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Finance

TYPES OF HYBRID FUNDS

Owning a diversified portfolio with investment havens across varying asset classes and securities is always desirable. This is because diversification helps to mitigate risks to a great extent. However, in the quest to diversify one’s portfolio, an investor often ends up investing in several mutual funds. Wouldn’t it be amazing if there was a way where you can invest in numerous asset classes through one fund itself? Well, there is. Hybrid mutual funds help you precisely do the same.

What is hybrid fund?

Hybrid funds are types of mutual funds that enjoy the flexibility to invest in both equity and debt instruments simultaneously that are designed to meet the objectives of the hybrid fund scheme. Different hybrid fund schemes have varying combinations of debt and equity securities targeted to different types of investors with different investment goals. As such, the portfolio enjoys the potential of substantially higher returns via the equity component and tend to resist the high volatility of the markets through the debt component. There are different types of hybrid funds to suit investors with different risk profiles. This article will focus on types of hybrid funds available to investors.

  1. Equity-oriented hybrid funds
    Such schemes invest a minimum of 65% of their corpus in equity and equity-related securities across various market sectors and market capitalisations. The remaining assets are invested in money market instruments and debt instruments.
  2. Debt-oriented hybrid funds
    Such schemes invest a minimum of 65% of their total corpus in debt securities. The debt component of the scheme comprises of investment in fixed-income instruments such as debentures, treasury bills, government securities, bonds, and so on. To gain liquidity, some part of the fund could also be invested in cash and cash equivalents.
  3. Monthly income plans
    These hybrid funds invest in fixed-income securities and also allocate a small portion of their total assets to equity and equity-related investments. This permits such schemes to produce better returns than pure debt-oriented hybrid funds. This fund also offers regular income to investors.
  4. Balanced hybrid funds
    Balanced funds invest at least 65% of their corpus in equity and equity-related securities and the rest of the corpus in debt securities and cash equivalents. For taxation, balanced funds are taxed like equity funds and provide tax exemption on long-term capital gains (LTCG) of up to Rs. 1 lakh. The fixed income helps equity investors in mitigating the volatility of equity markets.
  5. Arbitrage funds
    Arbitrage hybrid funds purchase stocks at a lesser price in one market and trade it at a higher price in another market. The fund manager relentlessly looks for arbitrage opportunities to maximise the scheme’s returns. However, there are times when decent arbitrage opportunities are not offered. During such times, the fund manager invests primarily in debt securities and cash equivalents. Arbitrage hybrid fund schemes are considered to be as safe as debt funds.

The strategic philosophies behind hybrid funds are diversification and asset allocation. Most investors invest in hybrid funds intending to generate wealth appreciation via equity component and to mitigate the volatility in the markets via debt allocation in the portfolio. Happy investing!

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