There are several types of mutual funds that you can invest in. They are primarily categorised into equity funds, debt funds, and hybrid funds based on the asset class they invest the majority of their portfolio in. Equity funds primarily invest in stocks and other equity-related instruments while debt funds invest in fixed-income securities such as bonds and treasury bills. Each has its own pros and cons, and hybrid funds aim to offer the best of both to investors by investing in both asset classes. Here’s why you should consider investing in hybrid funds if you are worried about the current market volatility:
This is the primary reason to invest in hybrid funds. The debt allocation of the hybrid funds will hedge the risk of market volatility of the underlying equity investments. But, at the same time, the returns of hybrid funds will tend to be higher than those of the debt funds. So, hybrid funds, with their moderate risk level and moderate returns, are in between the high-risk high-return profile of equity funds and the low-risk low-return profile of debt funds.
Some types of mutual funds don’t allow for much flexibility on the part of the fund manager as they come with asset allocation restrictions by the Securities and Exchange Board of India (SEBI). For instance, with debt funds, the fund manager has to invest based on parameters such as the credit rating of the instruments, maturity, etc. In equity funds, such as multi-cap funds, 25% has to be invested in small-cap, mid-cap, and large-cap stocks each. But in hybrid funds, the fund manager has more flexibility.
When equity funds are held for more than 12 months, capital gains on them are considered Long-Term Capital Gains (LTCGs) and taxed at 10%. For debt funds, the units need to be held for over 36 months to be considered LTCGs and they are taxed at 20%. With certain categories of hybrid funds, such as equity savings funds and balanced advantage funds, since the equity allocation is higher than debt, they are taxed as equity funds. This is also advantageous because LTCGs on equity funds are exempted from tax up to Rs. 1 lakh.
The bottom line
The benefits of hybrid funds are even more pronounced during times of uncertainty. By investing across asset classes, hybrid funds considerably reduce your investment risk. Some hybrid funds may even invest in asset classes such as gold and real estate. You should look at your current investment portfolio’s asset allocation and consider how it is aligned with your risk tolerance and goals. Accordingly, you can choose the right type of hybrid mutual fund and know how much you should invest in it. You can also opt for a Systematic Investment Plan (SIP) and use an SIP calculator to calculate your mutual fund returns.