When you invest in mutual funds your risk tolerance play a very important factor. If you do not have high risk taking capacity but you take higher exposure in equities then you will be jittery whenever there is a downfall. Although investments in equities are desirable for long term wealth accumulation the amount of exposure depends on your comfort ability with volatility of equity markets.
Within mutual funds there are various categories of schemes which cater to different risk tolerance of investors. A hybrid fund is one of these categories. As the name suggests these funds underline investment is a mix of various asset class. Different hybrid funds allocate different ratio to the asset classes and so choice of such funds will primarily be based on your investment objective and your risk taking ability.
Let’s understand different type of hybrid funds and where they are suitable for investments:
1. Equity Oriented Hybrid Funds
These funds are more tilted towards equities i.e. they have more exposure to equities then debt. Balanced funds fall in this category. Since equity exposure is high volatility of these funds is also higher. For risk averse investor these funds may fall in very high risk category but in general they are an ideal investment options for long term. The performance of these funds has been at par with diversified equity funds which make them an attractive investment avenue. For first time investors looking to take exposure in equities for long term balanced funds are advisable option as it gives some downside protection when compared to diversified funds. Since balanced funds have equity exposure of more than 65% they are treated as equity investment for capital gains taxation.
2. Debt oriented Hybrid funds
This category has many varieties named as conservative, moderate or aggressive funds. The exposure to equity and debt varies within these schemes. While a conservative hybrid funds will limit equity exposure to 10%, a moderate can go upto 20% while aggressive hybrid mutual funds scheme will have option to take equity exposure up to 30%. Due to this variation in exposure the risk return characteristics among these funds varies. Monthly Income plans or MIPs falls within this debt oriented hybrid structure. So for a conservative investor a conservative hybrid fund will be a viable investment option while for an investor with a higher risk tolerance aggressive hybrid funds makes a good choice. The final selection will be based on one’s requirement. The tax treatment of these funds is that of debt and so changes in this year budget will impact the investment. The holding period of three years for long term capital gains and a change in the calculation of DDT is what investors will have to take note before making their choice.
3. Other Hybrid Funds
There are few other mutual funds schemes which can be termed as hybrid funds. First one is the arbitrage funds. These funds aim to capture arbitrage opportunities in the cash and derivative market and invest a sizeable portion in the debt segment. Ever since debt funds taxation was increased these funds attraction have also increased due to considered lower volatility and equity taxation. But investor needs to understand that these are equity funds and so there is risk associated. The other funds which can be termed as hybrid funds are asset allocation funds which keep varying exposure to discussed asset classes. Most of these funds are funds of funds schemes. The taxation of these two types of hybrid funds varies wherein arbitrage funds are treated as equity funds while funds of funds taxation is that of debt which is the major drawback with them.
A Hybrid fund benefit is the mix of different asset class which actually takes care of the volatility and return generation. But as an investor which hybrid funds to choose rest on your time horizon, risk appetite and your requirement. A balanced fund will need a longer horizon for investment then a Monthly Income Plan which is a more considerable option for regular income need. The final scheme selection should be done after analyzing and matching it with your requirement.