Know All About Hybrid Funds
Hybrid funds help you spread risks over equity and debt
Hybrid funds – which invest in equity and debt- are increasingly seen as an alternative for investors to diversify risks. These funds can assist steady income for investors (from the debt component) and facilitate capital appreciation (from the equity side). As such, equity tends to be more volatile than debt; hence, having a mixed exposure is advisable as these assets share a low correlation. Let’s now look at few variants of hybrid funds in this article.
Chart 1: Types of Hybrid Funds
A) Balanced funds
invest generally more than 50% of their portfolio in equity and equity-related securities and the balance in debt and money market instruments. The equity portion has potential to deliver better long-term returns, while debt provides stability. Returns from Balanced Funds are tax-free, if they are held for more than one year. Further any dividend declared by the scheme is also tax free. They are ideal for investors with a moderate risk profile and an investment horizon of over three years.
B) Monthly income plans (MIPs) are debt-oriented hybrid funds, with a marginal exposure to equity (upto 30%). They offer regular returns – on a monthly, quarterly, half-yearly or annual basis, as per the investors’ discretion. While these plans are relatively less riskier than pure equity funds, they are slightly riskier than pure debt funds. They offer both growth and dividend (payout and re-investment) options.
• Monthly Income is not assured and is subject to availability of distributable surplus
Encouraging performance across longer time frames
Hybrid funds have delivered superior returns over the analysed periods. The inherent asset allocation has ensured stable returns. Hybrid funds (represented by CRISIL – AMFI Hybrid Fund Performance index) have returned nearly 14% and 13% over 3-year, 7-year and 10-year periods, as on September 30, 2015. They have outperformed both the debt (CRISIL Composite Bond Fund Index) and equity (CNX NIFTY) benchmarks, for most time frames. .
*Returns, as on September 30, 2015 and above one year, are annualized Source: CRISIL Database
Diversification – Spreading investments across various asset classes can help investors reduce market risk and moderates effects of individual asset class performance on returns. Debt instruments ensure stable incomes, while equities boost returns. In this context, MIPs may offer consistent returns as they are less exposed to equities.
Hassle-free - Managing separate portfolios of equity and debt becomes tedious and involves churning cost and tax implications. One may also not be able to tactically adjust allocations as per market movements. Being a single structure, hybrid funds are more hassle-free as fund managers are well-equipped to take timely calls.
Tax-efficient – On average, equities form 65% of portfolio for balanced funds (please check the specific schemes you choose to invest in). Thus, these funds are taxed on lines of equity funds (a 15% short-term capital gains tax plus the applicable surcharge and cess). While MIPs are taxed like debt funds, investors can trim the tax outgo by seeking indexation benefit by holding securities for over three years.
Investors with a moderate risk appetite can benefit from hybrid funds, especially when markets are volatile. Investors should choose funds, after evaluating their past performance and portfolio composition and also consider their risk appetite, returns expected and time horizon.
Please consult your financial advisor for more details on Hybrid Funds.
Disclaimer : Any information contained in this article is only for informational purpose and does not constitute advice or offer to sell/purchase units of the schemes of SBI Mutual Fund. Information and content herein has been provided by CRISIL Research, a Division of CRISIL Limited, and is to be read from an investment awareness and education perspective only. The views / content expressed herein do not constitute the opinions of SBI Mutual Fund or recommendation of any course of action to be followed by the reader. Investors should consult their financial advisers before taking any investment decision.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.