If you are an investment aficionado, equities maybe your preferred bet. However, high-risk equities are typically, not every investor’s cup of tea. Many investors aim to play safe and seek assured returns. For them, the safety factor afforded by debt funds can be more promising.
What if the prospects of equities excite you, but you do not wish to compromise the safety of your capital?
Hybrid funds can be the answer. They offer the best of both worlds – the growth potential of equities and the regular revenue afforded by fixed-income securities.
Read to know what hybrid funds are and how to invest in them.
What are hybrid funds?
Hybrid funds invest in debt instruments and equities. This can ensure a perfect blend of maximum diversification of your portfolio along with the safety-net of assured returns.
You can choose a hybrid fund based on your risk preferences and investment objective. The equity component of the fund can aid in wealth appreciation in the long-run, while the returns from the debt component provide a steady income in the short-term. Hybrid funds are managed by professionals; here, your fund manager invests in equity and debt in varying proportions.
Types of hybrid funds
- Equity-oriented hybrid funds: In these funds, at least 65% of the investments are channelized into equities and approximately 10% in debt instruments. The risk factor is moderate.
- Debt-oriented balanced funds: Here, the debt component is invested in fixed-income securities like bonds, government securities, debentures, treasury bills, etc. These funds are classified into aggressive, moderate and conservative funds. An aggressive hybrid mutual fund is composed of 30% equity, a moderate hybrid mutual fund has a maximum of 30% equity, and a conservative hybrid mutual fund has an equity exposure of a maximum of 10%. Monthly income plans also fall in this category. On investing in a debt hybrid fund, you can receive regular returns on an annual, half-yearly, quarterly or monthly basis.
- Arbitrage hybrid funds: In arbitrage funds, the fund manager buys the stock at a lower price in one market and sells it a higher price in another market to maximize returns. At least 65 per cent of the investment is held in equities. For taxation purposes, they are categorised as equities. Depending on how long you stay invested, you can pay either short-term capital gains tax or the long-term capital gains tax.
- Multi-asset allocation fund: Investments are made in three asset classes in these hybrid funds. This means you can invest in an extra asset class besides equity and debt. Typically, the third asset class is gold. You will have to invest a minimum of 10% in each asset group.
Hybrid funds are regarded as safer than pure equity funds and can generate higher returns than pure debt funds. These funds are ideal if you are a conservative investor or if you are new to the world of investing. You can simultaneously get exposure to the equity markets while the debt component cushions your capital against market volatilities. On the other hand, high-risk investments do not daunt you, hybrid funds can let you reap maximum benefits during market highs.
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