Mutual funds can be divided into three primary categories – equity, debt, and hybrid mutual funds. Equity funds primarily invest in stocks of other companies, debt funds primarily invest in fixed income assets, and hybrid funds offer the best of both worlds by investing in both equity and debt. If you, too, want to enjoy the benefits of equity as well as debt funds, you can invest in hybrid mutual funds. There are several types of hybrid funds. Read on to know what these are and which of these can be better for your needs.
Types of hybrid mutual funds
- Equity-oriented hybrid funds: These are mutual funds that invest more than 65% of their assets in equity. The rest of the 35% holdings can be invested in debt and money market instruments. These may carry some risk due to the high percentage of equity.
- Debt-oriented balanced funds: These mutual funds invest more than 65% of their assets in fixed income debt instruments like bonds, treasury bills, debentures, government securities, etc. The rest of the 40% is invested in equity and cash and cash equivalents. These carry comparatively lower risk due to high exposure to debt.
- Balanced funds: These funds are similar to equity-oriented hybrid funds and invest at least 65% of their assets in equity and equity-related securities and the remaining in debt instruments and cash. However, they are taxed as equity funds. So you can claim a tax exemption on long-term capital gains of up to Rs. 1 lakh.
- Monthly income plans: These hybrid funds predominantly invest in debt instruments with a little exposure to equity. As a result, these mutual funds can offer higher returns compared to pure debt mutual funds. Monthly income plans also offer a regular dividend either monthly, quarterly, half-yearly, or annually.
- Arbitrage funds: Arbitrage exposure funds buy stocks at a lower price and later sell them at a higher price in another market. The fund manager makes most of the buying and selling decisions, so it is important to check the fund manager’s track record and past performance before selecting an arbitrage fund. Another thing to know about these funds is that there may not always be arbitrage opportunities available in the market. In such a case, these funds invest in debt instruments or cash. Moreover, these are taxed as equity funds on long-term capital gains.
How to choose the right hybrid mutual funds?
You must pay attention to factors such as your risk appetite, financial goals, budget, and investment horizon and then select a suitable hybrid fund. In addition to this, the taxation rules of debt and equity funds are also a consideration. If the hybrid fund has 65% or more debt securities, the fund will be taxed like debt funds. However, if the fund has invested in more than 65% of equities, it will be taxed as equity funds.
To sum it up
The Tata Capital Moneyfy App offers several hybrid mutual fund options that you can invest in. Now that you know the different types, you can search for suitable mutual fund schemes on the Moneyfy App and create a portfolio that aligns with your goals.