All of us need to have a mix of asset classes for an optimal portfolio. Too much equity and our short term goals can be at stake, whereas a debt-only portfolio affects the ability to earn inflation adjusted returns in the long run. Managing a good mix of equity and debt funds all by you can be a little challenging. And that’s where hybrid mutual funds come in.
Like the name suggests, a hybrid fund is a mix of equity and debt funds. Its portfolio would have a certain portion in equity shares and a certain portion in debt securities like bonds, Certificate of Deposits (CDs) and Treasury Bills (T-Bills). Typically, returns from a hybrid fund are lesser than equity funds and so are the risks.
Depending on the equity-debt break-up, hybrid funds are classified in the industry as aggressive or conservative hybrid funds. Aggressive funds have greater equity exposure; anywhere between 65-75% or so, with the rest in debt papers and cash equivalents. Conservative funds have lesser equity allocation. The fund manager balances the fund’s portfolio at the mandated levels whenever the economic, regulatory, political, global events and other related factors move the equity or debt component either way.
From the taxation perspective, hybrid funds are either equity oriented or non-equity oriented. Equity oriented funds are those where equity makes up for at least 65% or more of the total portfolio, the taxation is similar to equity funds. Funds with an equity component lesser than 65% are treated as other than equity funds for taxation.
One drawback with hybrid funds, as far as their utility as asset allocation products are concerned, is that the asset allocation is static. It cannot be altered dynamically on the basis on market conditions, your life stage or financial goals, unlike in products like National Pension Scheme (NPS).
Broadly, hybrid funds are useful to diversify one’s portfolio across equity and debt markets. Those with the time, knowledge and willingness to tweak asset allocation to personal goals and needs from time to time, can do so manually through individual equity, debt and gold investments. For others, hybrid funds can be an option to keep asset allocation at certain fixed levels.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.