When it comes to investing, there are plenty of options available to investors. Mutual funds are among the most popular investment options for both novice and experienced investors. A mutual fund is a professionally managed investment fund that pools money from multiple investors to purchase securities like stocks, bonds, and other financial assets.
As the Indian economy is growing, the financial market has also seen an upturn. India has a large number of mutual funds, and with different categories of funds, it can be challenging to select the right fund for your investment. This article will explore the benefits of investing in hybrid mutual funds, which combine both equity and fixed-income instruments.
What Are Hybrid Mutual Funds?
As mentioned earlier, hybrid mutual funds invest in both equity and debt instruments, making them an ideal investment option for investors looking for a balanced portfolio. They are designed to offer capital appreciation and regular income. Hybrid funds invest in a mix of equity and fixed-income securities, depending on the investment objective of the fund.
Moreover, hybrid mutual funds are further categorized into three different types. One is equity-oriented, where at least 65% of the total assets are invested in equity instruments. The second is debt-oriented, where at least 75% of the total assets are invested in debt securities. The third is balanced funds, where the allocations are neutral, i.e., an equal percentage of assets are invested in equity and debt instruments.
Advantages of Investing in Hybrid Mutual Funds
Diversification: Hybrid mutual funds offer diversification across various asset classes, reducing the risk of market volatility. When one asset class underperforms, the performance of the other asset class can cushion the fall, thus offering better stability in returns and reducing the inherent risks associated with a single asset class.
Regular Income: Hybrid mutual funds offer a regular income as they invest in both equities and debt securities. Equity investments provide the potential for capital appreciation, and debt investments offer regular income through interest payments, making it a suitable choice for investors seeking income.
Professional Management: Hybrid mutual funds are managed by professional fund managers who have a strong understanding of the market and have access to data and research. The fund managers use a mix of strategies to balance the equity and fixed-income investments, which is suitable for investors who do not have the time or knowledge to research the market themselves.
Potentially Higher Returns: As hybrid mutual funds invest in both equity and fixed-income securities, they have the potential to generate higher returns than fixed-income investments and be less volatile than equity investments. Hybrid funds offer investors the opportunity to participate in the equity market’s potential returns while reducing the risk through a mix of investment options.
Tax Benefits: Hybrid mutual funds offer tax benefits under section 80C of the Income Tax Act, 1961, and Investors can claim a deduction of up to 1.5 lakh INR annually on investments in these funds. Moreover, the long-term capital gains from hybrid funds (>36 months) are taxed at 20% with indexation, which lowers the tax obligation.
Disadvantages of Investing in Hybrid Mutual Funds
Market Risk: Although hybrid mutual funds offer diversification, they still involve some degree of market risk. Market risks can result in a loss of investment, especially when the equity market undergoes a downturn.
Expense Ratio: Hybrid mutual funds incur an expense ratio, which is a fee charged for managing the fund. Investors must be aware of the expense ratio, as it can eat into their returns, making it crucial to choose a fund with a low expense ratio.
In conclusion, if investors want to invest in a balanced portfolio that offers both regular income and potential capital appreciation, then hybrid mutual funds would be an ideal choice. Hybrid mutual funds offer investors the best of both worlds, equity and fixed income while reducing the downside risk and providing diversification to their investment portfolio. Investors must do their research and consult their financial advisors before investing in the Indian financial market.
Disclaimer: The article is for informational purposes only, and readers should not consider it as investment advice. Investors must assess and analyze all the pros and cons carefully before investing in mutual funds. The Indian financial market can be volatile at times, and investors must be comfortable with the inherent risks associated with trading in the Indian financial market.
Mutual funds are an excellent investment option for both novice and experienced investors. Hybrid mutual funds are a popular investment option that combines equity and fixed-income instruments to offer regular income and potential capital appreciation. Hybrid mutual funds offer diversification, professional management, potentially higher returns, and tax benefits. However, investors should consider the market risks and expense ratio before investing. Before investing, investors should do their research and consult their financial advisors to make an informed decision about investing in the Indian financial market.