Direct & Indirect Taxes, Tax Ready Reckoner, Tax Management, Tax Act. & Rules, Tax Planning & Tax Savings.

Direct & Indirect Taxes, Tax Ready Reckoner, Tax Management, Tax Act. & Rules, Tax Planning & Tax Savings.

Hybrid Mutual Funds

Hybrid mutual funds are types of mutual funds that invest in more than one asset class. Most often, they are a combination of Equity and Debt assets, and sometimes they also include Gold or even Real estate.

The key philosophies behind hybrid funds are – asset allocation, correlation, and diversification. Asset Allocation is the process of deciding how to distribute wealth among various asset classes, and correlation is the co-movement of returns of the assets, and diversification is to have more than one asset in a portfolio.

Hybrid Mutual Funds
Hybrid Mutual Funds

A hybrid fund endeavours to create a balanced portfolio to offer regular income to its investors along with capital appreciation in the long-term. The fund manager creates a portfolio according to the investment objective of the scheme and allocates the funds in equity and debt instruments in varying proportions. Further, the fund manager also buys or sells assets if the market movements are favourable.

Hybrid funds are considered to be riskier than debt funds but safer than equity funds. They tend to offer better returns than debt funds and are preferred by many low-risk investors. Further, new investors who are unsure about stepping into the equity markets tend to turn towards hybrid funds. This is because the debt component offers stability while they test the equity ‘waters’. Hybrid funds allow investors to make the most out of equity investments while cushioning themselves against extreme volatility in the market.

Since every hybrid fund can have a different asset allocation between equity and debt, they can be classified into the following types:

  1. Conservative Hybrid Mutual Funds
  2. Arbitrage Hybrid Mutual Funds
  3. Equity Savings Mutual Funds
  4. Dynamic Asset Allocation / Balanced Advantage Mutual Funds
  5. Multi Asset Allocation Mutual Fund

1.   Conservative Hybrid Mutual Funds

The next topic which we are going to cover under hybrid funds is conservative hybrid fund these are the hybrid funds again with the combination of equity and debt both and out of which has a major portion of allocation almost 75 to 90% in debt related security, and just 10 to 25% allocation to the equity related securities and therefore they are being taxed as debt funds.

This conservative hybrid fund earlier known as debt related hybrid fund or the monthly income plans. The returns of this funds are relatively higher than pure debt fund, due to a small portion of allocation to the equity related investment instruments.
It also carries both equity related and interest rate related risk, and interest rate related risk is quite on the higher side due to the higher allocation to the debt portion of investment portfolio.

(1)   Should We Invest in Conservative Hybrid Fund?

This fund can be ideal investment option for the person who are nearing their retirement or those who retired having income source and also for the conservative investors those who want higher return by investment in debt options available in market with a very slight higher risk of exposure due to equity investment.

In long term of 3 year and Plus this conservative hybrid funds can give returns upto 7%-1O% which is much more beneficial than Bank fixed deposits FD and the monthly income plan of post offices that is MIP of post office, and therefore application of systematic withdrawal plan that is SWP, a fixed amount can be withdrawal every month as a form of income which is on par and even better than the annuities from the retirement plan and the monthly pay out from the interest of fixed deposit.

See also  Bond (Fixed Income) Concepts under Mutual Fund Investment

(2)   Top Performing Conservative Hybrid Mutual Funds

>>        Kotak Debt Hybrid

>>        Baroda Conservative Hybrid Fund – Plan A

>>        Canara Robeco Conservative Hybrid Fund

>>        ICICI Prudential Regular Savings Fund

>>        HSBC Regular Savings Plan

>>        LIC MF Debt Hybrid Fund

(3)   Average Conservative Hybrid Mutual Funds

>>        Franklin India Debt Hybrid Fund

>>        BNP Paribas Conservative Hybrid Fund

>>        IDFC Regular Savings Fund

>>        SBI Debt Hybrid Fund

>>        L&T Conservative Hybrid Fund

>>        Indiabulls Savings Income Fund

>>        HDFC Hybrid Debt Fund

>>        Essel Regular Savings Fund

(4)   Worst Conservative Hybrid Mutual Funds

>>        DSP Regular Savings Fund

>>        UTI Regular Savings Fund

>>        Nippon India Hybrid Bond Fund

>>        Axis Regular Saver Fund

>>        Sundaram Debt Oriented Hybrid Fund

>>        BOI AXA Conservative Hybrid

2.   Arbitrage Hybrid Mutual Funds

This is one of the new category of hybrid fund which is formed to take the benefits of difference in price change of Asset class in the different market by simultaneous buying and selling of the same asset class, and this is also known as arbitrage, and these funds follow this type of trading strategies to generate very low risk profits by exploiting the difference in the price of a financial asset in different market or in different forms which is created due to the inefficiencies in market and this arbitrage funds exploit this inefficiencies of market to generate Returns.

These are great opportunities present in financial market due to the difference between the two indices, spot and future prices and currency exchanges and the fund managers of this arbitrage funds take the benefits of this price in between spot and cash markets in one hand and derivatives and future market on the other hand.

(1)   Shall We Invest in Arbitrage Fund?

As I already mention that are arbitrage funds are very low risk category of mutual funds as the fund manager reduces the risk of equity by hedging against derivatives and it is less impacted by market volatility. And the most important part is that these funds allocation is in equity and that’s why from the tax perspective these funds are being taxed as the equity fund category.

It is suitable for conservative investor and not for the aggressive investor who wants greater return from the growth of market.

Arbitrage funds provide the below average Returns and can even provide returns less than liquid funds, it can proved to be a good investment for a term of 1 to 2 years it is been tax as equity funds but it’s better to avoid such funds if you are interested in greater returns and you have the ability to take a little more risk in the market.

(2)   Top Performing Arbitrage Mutual Funds

>>        DSP Arbitrage fund

>>        BNP Paribas Arbitrage Fund

>>        UTI Arbitrage Fund

>>        Edelweiss Arbitrage Fund

>>        Axis Arbitrage Fund

(3)   Average Arbitrage Mutual Funds

>>        IDFC Arbitrage Fund

>>        Nippon India Arbitrage Fund

>>        Aditya Birla Sun Life Arbitrage Fund

>>        Kotak Equity Arbitrage Fund

>>        SB! Arbitrage Opportunities Fund

>>        HDFC Arbitrage Fund — Wholesale

>>        ICICI Prudential Equity – Arbitrage Fund

>>        L&T Arbitrage Opportunities Fund

>>        Invesco India Arbitrage Fund

(4)   Worst Arbitrage Mutual Funds

>>        Indiabulls Arbitrage Fund

>>        PGIM India Arbitrage Fund

>>        BOl AXA Arbitrage Fund

>>        JM Arbitrage Fund

>>        Essel Arbitrage Fund

>>        Principal Arbitrage Fund

>>        ITT Arbitrage Fund

>>        Tata Arbitrage Fund

>>        Union Arbitrage Fund

>>        LIC MF Arbitrage Fund

3.   Equity Savings Mutual Funds

This is all together a new category formed in hybrid fund by the SEBI after Re-categorization of 2018 with a purpose to balance risk and return by investing in debt equity and derivatives, with almost a one third allocation to the equity related instruments one third in the fixed income Assets and one third in the arbitrage.

And the most important advantage of this equity savings fund is that the risk profile of this fund is on par with the Debt fund but the tax profile of these funds are of equity funds which is formed by the combination of both one third of arbitrage and one third of equity related instruments that is almost 65 % and more in this funds.

See also  Financial Statement of Mutual Fund

And this equity saving schemes can considered to be a very ideal choice for a conservative
investor investment portfolio as the equity related instruments in this funds are almost near to 33% and can go higher also and therefore they can produce are returns greater than conservative hybrid funds or the debt funds or the liquid funds.

(1)   Should We Invest in Equity Saving Schemes?

Again here also this fund is not meant for the aggressive investor as the returns tends to be quite low as compared to the aggressive hybrid fund of the Hybrid Funds, but these funds are very ideal investment option available to the moderate and the conservative investors when compared to the conservative hybrid funds as the tax implication on this equity savings scheme is of equity related funds and the risk profile is of debt funds.

A very good instrument for investment period of up to 2 to 3 years for the conservative investors and the persons nearing their.

(2)   Top Performing Equity Savings Mutual Funds

>>        ICICI Prudential Equity Savings Fund

>>        SBI Equity Savings Fund

>>        Axis Equity Saver Fund

>>        Mirae Asset Equity Savings Fund

>>        Mahindra Dhan Sanchay Equity Savings Yojana

>>        Aditya Birla Sun Life Equity Savings Fund

>>        Kotak Equity Savings Fund

(3)   Average Equity Savings Mutual Funds

>>        PGIM India Equity Savings Fund

>>        Union Equity Savings Fund

>>        DSP Equity Savings Fund

>>        Tata Equity Savings Fund

>>        Edelweiss Equity Savings Fund

>>        IDBI Equity Savings Fund

(4)   Worst Equity Savings Mutual Funds

>>        IDFC Equity Savings Fund

>>        Principal Equity Savings Fund

>>        UTI Equity Savings Fund

>>        Franklin India Equity Savings Fund

>>        Franklin India Equity Savings Fund

>>        L&T Equity Savings Fund

>>        Nippon India Equity Savings Fund

>>        Invesco India Equity Savings Fund

>>        Baroda Equity Savings Fund

>>        Sundaram Equity Savings Fund

4.   Dynamic Asset Allocation / Balanced Advantage Mutual Funds

Dynamic asset allocation fund which is also known as balanced advantage fund invest in equity and debt both which are managed dynamically.

It provides a very good diversification across Equity and debt portfolio and based on the equity allocation these funds are being taxed as equity fund or the Debt. And if the allocation of equity is 65 % and above it is treated as equity fund and less than that will be treated as debt fund.

And of course with this allocation the risk in dynamic asset allocation fund is lower than aggressive hybrid funds but higher than and other categories of hybrid funds.

And the most important thing in this category of dynamic asset allocation is that the Asset allocation of entire portfolio can be managed dynamically from zero to hundred percent in equity or 80% to 100% in debt, which is based on the current market situation.

Like for example when the market situation is tough and the market is faffing at that particular time the major allocation in this kind of fund will be towards Debt instrument. But when the market is in Bull Run when the market is rising at that time the major allocation is towards equity-oriented instrument.

So, in both the cases Investment in this fund is a Win-Win situation because when equity will not perform Debt will perform and when Debt will not perform equity is going to perform.

And not just this it gives a lot of power of choice to a fund manager choose between equity and debt based on the market scenario which reduces the risk associated with investment and therefore the fund manager and his team is able to deliver a better risk adjusted returns to their mutual fund investors

(1)   Should We Invest in Dynamic Asset Allocation / Balanced Advantage Mutual Fund?

My answer will be why not to invest in this kind of fund where you can get risk adjusted return with even larger diversification then the Multicap fund because here the fund manager is completely free and has no restriction of choosing between different market capitalization choosing between equity and debt so that he can deliver his best.

It is suitable for both conservative an aggressive investor and this fund must be a part of core portfolio of mutual fund investor.

(2)   Top Dynamic Asset Allocation or Balanced Advantage Mutual Funds

>>        Kotak Balanced Advantage Fund

>>        Motilal Oswal Dynamic Fund

>>        ICICI Prudential Balanced Advantage Fund

See also  Scheme Information Document (SID) of Mutual Fund

>>        Baroda Dynamic Equity Fund

>>        Invesco India Dynamic Equity Fund

>>        Nippon India Balanced Advantage Fund

(3)   Average Dynamic Asset Allocation or Balanced Advantage Mutual Funds

>>        Union Balanced Advantage Fund

>>        DSP Dynamic Asset Allocation Fund

>>        IDFC Dynamic Equity Fund

>>        HDFC Balanced Advantage Fund

>>        Aditya Birla Sun Life Balanced Advantage Fund

>>        Edelweiss Balanced Advantage Fund

>>        L&T Balanced Advantage Fund

>>        Axis Dynamic Equity Fund

(4)   Worst Dynamic Asset Allocation or Balanced Advantage Mutual Funds

>>        SBI Dynamic Asset Allocation Fund

>>        Principal Balanced Advantage Fund

>>        BOI AXA Equity Debt Rebalancer Fund

>>        Shriram Balanced Advantage Fund

>>        BNP Paribas Dynamic Equity Fund

>>        Tata Balanced Advantage Fund

>>        Shriram Balanced Advantage Fund

5.   Multi Asset Allocation Mutual Fund

Multi asset allocation fund, which by definition given by the SEBI after the re-categorization of 2018 is the fund which have to invest at least in three asset classes with a minimum of allocation of at least 10% in each of these three asset classes which can be equity debt and gold mostly and it can be other asset classes like real estate and other.

The risk in this fund is equivalent to the dynamic asset allocation fund and so as the return also, multi asset allocation funds for can also deliver a very good risk adjusted Returns to the mutual fund investors in long term and here also the fund manager is completely free to choose between three different asset classes and make a choice depending on the current market situation the only difference is here one more asset class that is third asset class he has to compulsory add in their portfolio.

Taxation is also the same as the dynamic asset allocation fund depending on the allocation towards the equity if its greater than equal to 65 % treated as equity fund and if it is less than that and it will be taken as a debt fund.

(1)   Should We Invest in Multi Asset Allocation Fund?

And the answer you must invest in this kind of funds which can give you a diversification between three different asset classes, and can provide you a very good risk adjusted return which they have proven last 2 years that too in market fall of 2018 they have perform very well and provided a very good return with minimum standard deviation.

(2)   Top Multi Asset Allocation Mutual Funds

>>        Axis Triple Advantage Fund

>>        SBI Multi Asset Allocation Fund

>>        ICICI Prudential Multi-Asset Fund

(3)   Average Multi Asset Allocation Mutual Funds

>>        HDFC Multi-Asset Fund

>>        Quant Multi Asset Fund

>>        Essel 3 in 1 Fund

(4)   Worst Multi Asset Allocation Mutual Funds

>>           UTI Multi Asset Fund

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