Investing in financial markets can be a daunting task, especially when faced with a multitude of options. Among the many investment avenues available, hybrid funds have gained significant popularity among Indian investors.
Combining the benefits of equity and debt investments, hybrid funds offer a unique proposition that appeals to a wide range of individuals seeking a balanced approach to wealth creation.
What are hybrid funds?
Hybrid or balanced funds are mutual funds that invest in a mix of equity and debt instruments. These funds aim to provide diversification by capitalizing on the potential for growth in equities while minimizing risk through debt exposure.
Features of hybrid funds
Diversification: This diversification helps reduce the impact of market volatility and spreads risk across different sectors and securities.
Risk-adjusted returns: Hybrid funds balance growth and stability, offering investors the potential for higher returns compared to pure debt funds while mitigating downside risk. The equity component provides the opportunity for capital appreciation, while the debt component provides stability and income generation.
Flexibility: Hybrid funds come in different variants, such as conservative, balanced, and aggressive, allowing investors to choose a fund that aligns with their risk tolerance and investment objectives. Conservative hybrid funds have a higher allocation to debt instruments, while aggressive hybrid funds have a higher allocation to equities.
How to invest in hybrid funds?
Investing in hybrid funds is a straightforward process. Follow these steps to get started:
- Set your financial goals: Determine your investment objectives, whether wealth creation, regular income, or a combination of both. Define your risk tolerance and investment horizon to align with the appropriate hybrid fund category.
- Research and select a fund: Conduct thorough research on different hybrid funds available in the market. Consider factors such as past performance, expense ratio, fund manager expertise, and the fund’s investment philosophy. Select a fund that matches your investment goals and risk profile.
- KYC compliance: Complete the Know Your Customer (KYC) process by submitting the necessary documents, including identity proof, address proof, and a passport-sized photograph, as required by the fund house or the intermediary through which you plan to invest.
- Invest and monitor: Once your KYC process is complete, invest in the selected hybrid fund directly or through a trusted intermediary. Monitor your investment periodically to ensure it aligns with your financial goals and make any necessary adjustments over time.
Taxation in hybrid funds
Taxation in hybrid funds is determined based on the fund’s asset allocation and the investment’s holding period. Here’s a brief overview:
- Equity-oriented hybrid funds: If the hybrid fund holds at least 65% of its assets in equities, it is considered an equity-oriented hybrid fund. Long-term capital gains (LTCG) tax of 10% is applicable if the investment is held for more than one year. Short-term capital gains (STCG) tax of 15% is applicable if the investment is held for less than one year.
- Debt-oriented hybrid funds: If the hybrid fund holds most of its assets in debt instruments, it is considered a debt-oriented hybrid fund. The taxation on debt-oriented hybrid funds is similar to that of debt funds. LTCG tax of 20% with indexation or 10% without indexation is applicable if the investment is held for more than three years. STCG tax is added to the investor’s income and taxed at their applicable income tax slab rate if the investment is held for less than three years.
To wrap up
Hybrid funds have emerged as an attractive investment option for Indian investors, offering a balanced approach to wealth creation. By understanding hybrid funds’ features, investment process, and taxation aspects, you can make informed investment decisions and maximize your potential returns while managing risk effectively.
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