Why you need to have hybrid mutual funds in your portfolio: Different types  of funds Part 2 | Advisorkhoj

Mutual funds are one of the most sought-after investment options for investors across India. As per AMFI data, the number of mutual fund investors in has India doubled to 2.39 crore as of 30 June 2021 from 1.19 crore at the end of March 2017. This only speaks volumes of how the mutual fund trend has picked and that more and more people are now switching from conventional investment avenues like bank fixed deposits to mutual fund investments.

Mutual funds are a pool of professionally managed funds where the AMC sources finances from investors sharing a common investment objective. This sum is later invested depending on the nature of the mutual fund scheme and its investment objective. For example, if a large-cap fund has the investment objective of generating long-term capital appreciation, it will do so by predominantly investing in equity and equity-related instruments of large-cap companies.

Similarly, a hybrid fund is a mutual fund that invests in multiple asset classes to achieve its investment objective. Let us take a look at hybrid funds and why one should consider them for their investment portfolio.

What is a hybrid fund?

A hybrid fund is a ‘hybrid’ of equity and debt asset classes as it builds its investment portfolio by combining these two. We all know that equity funds invest in the stock market and debt funds invest in fixed income securities. Although some refer to them as balanced funds, not all hybrid funds are balanced funds. A hybrid fund invests in both equity and debt-related instruments. Hybrid funds can be equity and debt-oriented. Schemes like aggressive hybrid funds which invest 65 percent to 80 percent of their investible corpus in equity are equity-oriented whereas conservative hybrid funds which invest a majority of their investible corpus in debt are deemed as debt-oriented hybrid funds.

Why should you consider investing in hybrid funds?

To begin with, hybrid funds give investors the benefit of two asset classes through a single mutual fund scheme. They are treated as equity funds when it comes to taxation and has an LTCG tax of 10% for capital gains exceeding Rs. 1 lakh in a fiscal year. Investors seeking diversification may consider investing in hybrid funds as well. Hybrid funds try to generate returns through their investments in equity while mitigating the overall investment risk by spreading assets across debt instruments.

There are a variety of hybrid funds for investors to choose from. Investors can closely study the various hybrid schemes and consider investing in one which holds the potential to help them with their financial goals. Hybrid funds try to mitigate investment risk but that doesn’t make them entirely risk-free. Investors should invest as per their risk tolerance and also understand the risk profile of the hybrid scheme before investing.

Most hybrid funds aim to deliver better returns than debt schemes through an investment portfolio that is less risky than equity schemes. Investors who wish to add hybrid funds to their investment portfolio may consider starting a SIP in a hybrid fund. A Systematic Investment Plan is a simple and easy way to save and invest a fixed sum periodically for the long run. Investors can make the most out of the online SIP calculator which can tell them the total returns earned through SIP investing.

SIP can inculcate the discipline of regular investing without exposing one’s entire finances to market volatility. Investors can also benefit from the power of compounding and rupee cost averaging if they continue their SIP investing journey for the long term.