When building your wealth creation portfolio, it’s always important to identify assets that suit your risk versus reward appetite. For instance, if you invest primarily in equity, you are likely to get a higher rate of returns. On the downside, you also risk losing during market crashes. One approach to balancing risk with reward is to consider investing in hybrid funds, which can help you grow wealth by maintaining a balance. Let’s understand more about them.
The Basics of Hybrid Mutual Funds
Hybrid funds are designed to combine equity and debt investments and build a balanced portfolio. Every mutual fund has a dedicated fund manager who ensures that the funds are balanced in different assets and that you are diversified enough to withstand any sharp market crashes. Some hybrid funds also include gold and real estate. The ratio of equity and debt varies across various hybrid funds, and you can pick a hybrid mutual fund based on your needs.
Risk Versus Rewards
When investing, it is crucial to understand a few fundamental principles about the best hybrid mutual funds:
- They tend to be riskier than debt funds but less risky than equity funds.
- They offer higher returns than debt funds and are the preferred fund for investors with a low-risk appetite.
- If you are new to investing in equity markets, a great way to dip your toe in is through hybrid funds, as the debt allocation offers stability.
A Snapshot of the Key Hybrid Funds
Typically, hybrid funds can be classified under these categories:
- Equity savings/ Equity-oriented funds
This category tends to have 65% or more funds invested in equity and equity-related instruments, while investment in debt assets is on the lower side. One must stay invested for at least two years for optimal returns. This is a great option if you are planning for long-term goals such as funding school/ college education, a wedding, or building a retirement corpus.
- Balanced Funds
Typically, balanced funds have a minimum of 40% and a maximum of 60% in debt and equity. Long-term capital gains are exempt from tax up to Rs. 1 lakh. It’s ideal to stay invested for more than five years and use the funds for long-term goals.
- Arbitrage Funds
This category of hybrid mutual funds tends to invest 65 to 100 % in equity and 0 to 35 % in debt. However, their operating principle is that they purchase stocks in the cash market and sell via futures, with profits emerging from the price difference. The time horizon for investing must be more than three months. The fund’s success lies in the fund manager’s ability to capitalize on arbitrage opportunities.
How Hybrid Funds are Taxed
An equity-oriented hybrid fund is taxed like any equity fund. Long-term capital gains (LTCG) of over Rs. 1 lakh attract a tax slab of 10% without indexation. On the other hand, short-term capital gains (STCG) are taxed at 15%. Hence, it is ideal to redeem equity hybrid funds after one year.
On the other hand, debt-based funds are taxed like a debt fund. Short-term capital gains must be added to income and taxed as per the slab that applies to your tax bracket. However, long-term capital gains are taxed 10% without indexation benefits and 20% after indexation.
Choose the Right Hybrid Fund
The best hybrid mutual fund for you depends on your financial goals, risk appetite, and investing time horizon. However, rest assured that no matter what situation you’re in, hybrid funds can help you expedite your wealth creation goals. To learn more about hybrid funds, visit PGIM mutual funds.