Hybrid Funds Investment Guide: Amidst the record-breaking stock market rally, investors are now showing strong interest in hybrid funds. These funds invest in different asset classes such as stocks, bonds, and gold.
Hybrid Funds Benefits: Hybrid funds are becoming increasingly popular among mutual fund schemes. These funds offer investors the opportunity to invest in a variety of assets, such as stocks, bonds, gold, and investment trusts, all under one roof. They are an excellent option for those who don’t want to invest their entire corpus in a single asset class. The biggest advantage of investing in these funds is that they provide asset allocation and tax benefits.

What are hybrid funds?
A hybrid fund is a type of mutual fund scheme that invests in multiple asset classes simultaneously. Typically, these include stocks and bonds, or stocks, bonds, real estate investment trusts (REITs), and precious metals. Since most hybrid funds operate on a pre-determined asset allocation, they are also called asset allocation funds.

Different Categories of Hybrid Funds
Hybrid funds are available in many different categories, which investors can choose according to their risk appetite.

Equity Savings Funds: These funds invest 10-25% of their portfolio in equities, while the remaining funds are invested in a combination of debt securities and arbitrage strategies. They are suitable for investors with a low or moderate risk appetite and who seek stable returns with limited equity exposure.

Balanced hybrid funds: These funds invest 40-60% in both equity and debt. They are suitable for moderate-risk investors who want to balance returns from equities and reduce portfolio volatility with bonds.

Aggressive hybrid funds: These invest the majority of their funds, i.e., 65-80% in equities and 20-35% in debt. They are suitable for investors who are willing to take on more risk and are not bothered by the fluctuations of the equity market.

Dynamic Asset Advantage/Balanced Advantage Funds: These funds have the flexibility to invest 30% to 100% in equities, depending on stock valuations and market signals. The remaining funds are invested in debt and arbitrage assets. These are best for investors with a moderate risk appetite who prefer active rebalancing of their portfolios.

Multi-asset allocation funds: These funds invest at least 10% in each asset class, such as equity, debt, and gold, providing diversification across asset classes. They are suitable for investors who want a fund manager to invest their money in different asset classes.

Tax benefits from hybrid funds
Hybrid funds are also considered tax-efficient. If an investor invests in debt mutual funds, direct bonds, or deposits, the income earned is taxed according to their tax slab. This means that investors in higher tax brackets may have to pay up to 30% tax.

However, hybrid funds, if they have more than 65% equity exposure or a mix of equity and arbitrage funds, are considered equity funds for tax purposes. In such schemes, holding a 25-35% debt component for more than one year provides the benefit of long-term capital gains, which are taxed at only 12.5%.

How do hybrid funds allocate assets?
Some investors find it difficult to manage asset allocation on their own or cannot afford a financial planner. Hybrid funds solve this problem. They follow a pre-determined asset allocation and rebalance it regularly.

For example, an aggressive hybrid fund has 65-75% equity and the rest in fixed income. If the market rises sharply and the equity portion rises to 80%, the fund manager will sell equities and buy debt to bring the fund back to its original allocation. This process requires no action from the investor.

 PC:Mint