Hybrid Mutual Funds: Striking the Right Balance Between Risk and Return

Due to the wide range of investment vehicles available, there exist different kinds of investors too. Based on their risk appetite, they are classified as aggressive, moderate, and conservative. Aggressive investors prefer high-risk-high-return investments like equity, whereas conservative ones opt for low-risk investments like debt. And the set of investors who want to benefit from both debt and equity opt for instruments like hybrid funds.

Hybrid funds are mutual funds that invest in debt as well as equity instruments. This helps in minimising concentration risk and leads to diversification. The aim of hybrid funds is capital appreciation in the long-term along with income generation in the short-term.

1. Understanding the Concept of Risk and Return In Investments

When considering investments, it is crucial to have a clear understanding of the potential risk and return associated with each investment instrument. This helps investors make well-informed decisions. Risk refers to the potential loss on an investment and return refers to potential profit on an investment. A high-risk investment has the potential for high returns, whereas a low-risk investment offers stability but yields low returns.

2. The Role of Asset Allocation in Hybrid Funds

Asset allocation plays a very important role in hybrid funds; it is essential in determining the distribution of different asset classes. Hybrid funds are a combination of fixed-income securities and equity. The fund manager is responsible for making strategic decisions depending on the fund’s objectives and the market conditions to ensure the balance. Federal Bank offers mutual funds investment solutions that come with features like professional management, liquidity, and tax savings that benefit their customers. Visit their section on Mutual Funds to learn more.

3. Exploring the Types of Hybrid Mutual Funds

Let us explore the different types of hybrid mutual funds available:

i. Conservative Hybrid Funds

In this fund, the equity allocation ranges between 10%-25% and the debt allocation ranges between 75%-90%. This hybrid fund aims at safeguarding one’s capital and is best suited for risk-averse investors.

ii. Aggressive Hybrid Funds

In this popular category of hybrid funds, the equity allocation ranges between 65%-80% and the balance is invested in debt. This caters to aggressive investors due to the high equity allocation.

iii. Balanced Advantage/Dynamic Asset Allocation Fund

In this fund, there are no specific limits regarding the allocation of debt and equity. This fund is apt for beginners and conservative investors who want stability in their returns.

iv. Multi-Allocation Funds

In this fund, the investment is made in a minimum of three asset classes - equity, debt, and commodities. The minimum allocation in these asset classes is 10%. It is perfect for those who want to diversify their portfolio and create wealth.

v. Equity-Savings Fund

They invest in equities, debt, and equity arbitrage. There is a minimum of 65% investment in equities and a minimum of 10% in debt.

vi. Arbitrage Funds

They earn returns from the price difference of stocks in the cash and futures markets. For instance, if there is an expectation for the stock price to rise, the stock is simultaneously bought from the cash market and sold in the futures market.

4. Analysing the Equity Component: Risks and Potential Returns

In a hybrid mutual fund, the equity component includes an investment in equity or stocks. Stocks are subject to the volatility of market conditions and offer investors the potential for high growth and high returns. However, one must note that they are accompanied by high risk and volatility in contrast to fixed-income securities.

5. Examining the Debt Component: Stability and Income Generation

The debt element of hybrid funds includes investment in fixed-income securities like corporate bonds, government bonds, and other debt instruments. In contrast to equity, they are less volitive and offer stability in income.

6. Taxation and Expenses in Hybrid Funds

• Equity Component: It is taxed similarly to an equity fund. Long-term capital gains (LTCG) above Rs.1 lakh are taxed at 10%. Short-term capital gains (STCG) are taxed at 15%.
• Debt component: It is taxed similarly to a debt fund. These gains must be added to one’s income and taxed under the income slab. LTCG is taxable at 20% post-indexation and 10% without indexation.
• Expenses: Hybrid funds charge fees to manage the portfolio, known as the expense ratio.

Conclusion

Every investor must evaluate their financial goals, current financial status, risk tolerance levels, and investment horizon. This will help them make better decisions on which hybrid fund aligns with their goals and requirements. Visit Federal Bank to know more about their Mutual Fund investment offerings.