Hybrid Funds: A Good Bet To Take Th e Next Step

One of the hallmarks of mutual fund industry’s growth has been its ability to manage and offer a variety of funds to investors and allow them to design a portfolio in line with their risk profile, time horizon and objectives. Considering that for years, mutual funds were equated only with equities, it is a great achievement for the industry to reach this stage. The untiring efforts of all the stakeholders in the mutual fund industry to educate investors about different types of funds have helped in expanding its base and reach.

For example, the increased retail participation in debt funds is heartening as these funds not only have the potential to provide better returns than traditional options but also score over them in terms of tax efficiency, flexibility and the variety. However, the level of participation is still low and as a result a large section of investors in our country have not been able to benefit from their potential. Another category of funds that has remained out of investors’ radar is hybrid funds, popularly known as balanced funds. In other words, hybrid funds are a viable option for those who cannot manage their portfolio actively and are unable to balance it when required.

Mutual funds offer a variety of funds in this category with combinations such as equity and debt, equity and gold as well as multi-asset class funds investing in debt, equity and gold. Since the fund manager of a hybrid fund constantly rebalances the allocation to different asset classes upward or downward to align it with the maximum and minimum cap, the portfolio remains diversified at all times.

The most popular types of funds in this category are equity and debt oriented balanced funds. An equity oriented balanced fund is the one that invests around 65 percent or more in equities and the rest is invested in debt instruments. These are suitable for investors who do not want to invest the entire amount in equities but would mind a significant portion being invested into this asset class.

As is evident, equity oriented balanced funds make investors familiar with the vagaries of the stock market and how to deal with them. Another advantage of investing in these funds is their tax efficiency. To begin with, any dividend paid is tax free in the hands of investors. Besides, any long-term capital gain is tax free. However, short term capital gains are taxed at a fl at rate of 15 percent.

Then, there are debt-oriented hybrid funds that invest pre-dominantly in debt instruments and a small portion of the assets is invested in equities. The most popular funds in this category are Monthly Income Plans (MIPs). Although, the general perception is that these funds are ideal for investors who need regular income, the fact is that MIPs can be also be ideal for investors looking to have a restricted exposure in equities. Being a mutual fund product, these funds also are more tax effi cient than options such as fi xed deposit, small savings schemes and bonds. While long-term capital gains is taxed at a fl at rate of 10 percent (20 percent, if indexation is claimed), short term capital gains are taxed at one’s applicable tax rate. In case of dividend distribution, the fund has to pay a dividend distribution tax (DDT) of around 28.3 percent.

There are other variants of hybrid funds like Capital Protection Plans (closed ended funds) and asset allocation funds that off er investors an option to own a hybrid portfolio with diff erent objectives. As is evident, hybrid funds can be a great option for investors for diversifying their investments across asset classes as well as improving their portfolio return.

Hemant Rustagi CEO,
Wiseinvest Advisors Pvt Ltd