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When starting off as a low-risk investor or a new player in the market, hybrid funds are the go-to starting point. It encapsulates investments in all known asset classes and provides a diversified range of investment opportunities to the budding learner. Once the potential of equity investments, the fixed income component of debt products, the quick contracts in cash products and ideologies in other asset classes is understood, one can diversify their investment strategy and explore their risk appetite. Hybrid funds allow investors to explore this mixed bag of assets. Through constant monitoring and being in conversation with investment advisors, hybrid funds can be quite the stepping stone for budding money managers.
The Hybrid fund investment style
It is considered a conservative approach to investing in hybrid funds. The diversification offered by hybrid funds is not seen in any other mutual fund class. The balance of different fund classes provides a low-risk atmosphere for the investor to observe and learn. Along with this, the choice of funds and the cost involved in owning multiple classes is reduced thanks to the conservative hybrid fund approach. Time, money and knowledge is all accumulated in one space for players to explore and diversify. Having this pool ensures that all the benefits of different fund classes are maximized and all the drawbacks are minimized. It is important to note here that hybrid funds also have preferences and categorical alliances with certain asset classes which can change the way the fund is perceives or performs
Dangers of Hybrid funds
Although it seems like a rather good option to start with hybrid funds when it comes to investments, there are a few things that investors should vary of while selecting them.
- The risk factor – Low risk does not mean risk-free. There is a chance of incurring loss or erosion of capital with hybrid funds as well if not well managed.
- Lack of substitutes – Once we understand the market and want to diversify our risk exposure, the conservative hybrid funds do not allow for much change. Switching funds becomes the only alternative
- Revenue stream – Due to the diverse nature of hybrid funds, it becomes increasingly difficult to measure returns over a year or a few years. There is no straight path or pattern to the returns received and one cannot foresee a rise in the returns analysis
- Unfocussed approach – When we have all the eggs in one basket, it becomes difficult to concentrate on anyone. Having too many asset classes does become cumbersome when we need to concentrate on one single asset class. In order to understand equity, debt or cash instruments, consistent knowledge gains are important.
Hybrid fund taxation
Taxation is different for different asset classes. Equity products are taxed based on short term gains (less than 1 year), long term gains (more than 1 year) and statutory tax laws. Debt products have a fixed tax of 20% based on indexation. Other asset classes are taxed at 10% of total profits earned in a financial year. So depending on the amount of time we have held the investments, taxation may occur in several slabs over all the assets held. Thankfully nowadays, the taxation of mutual fund redemption is automated and can be calculated by the system on exit.
There are other components of surcharge and education cess as well which are chargeable in compliance with the Income Tax Act of 1961. Also, any profits earned over one lakh rupees after a year of investment is taxed at a flat rate of 10%
Conclusion
As discussed earlier, Hybrid funds are best suited for new investors. Their mixed portfolio of equity, debt, cash, derivatives and other asset classes provides a wide preview into the world of mutual funds and can unlock a lot of potential in risk-taking investors. Studying the fund performance and being in constant touch with your investment advisor can provide a lot of insight into the different classes and can define the risk appetite of the investor. It is always a good idea to start with hybrid funds however, in the long run, diversification generates better returns and exposes investment intelligence. It is preferred to have people explore all concepts of investments including traditional ones like FDs, and credit lines to understand the vast world of money-making.
