Consider these 9 things before investing in mutual funds!
What is the right way to invest in mutual funds? How do mutual funds work? What kind of risk is involved? Which fund is right for whom? What things should be kept in mind before investing? Watch this video to know-
An investor may not always wish to pursue an excessively aggressive or excessively conservative investment strategy in order to accomplish his financial objectives. In such instances, he may wish to maintain a balance in his investment portfolio. That said, investing in a hybrid mutual fund may be a better option. If you want to achieve a better rate of return than a debt fund while maintaining a lower risk level than an equity fund, a hybrid fund may meet your investment objectives.
What are hybrid mutual funds?
A hybrid fund seeks to build a balanced portfolio that provides regular income to investors while also providing long-term capital appreciation. The fund manager constructs a portfolio in accordance with the scheme’s investment goal and invests the money in a mix of equities and debt instruments in different proportions. Additionally, the fund management purchases or sells assets in response to the volatile market moves that can benefit investors.
Types of Hybrid funds
There are six types of hybrid funds. They are Conservative Hybrid Fund, Balanced Hybrid Fund/Aggressive Hybrid Fund, Dynamic Asset Allocation/Balanced Advantage Fund, Multi-Asset Allocation Fund, Arbitrage Fund, and Equity Savings Fund. Certain hybrid funds have a higher equity ratio, while others have a higher debt allocation. Let’s take a look at nine important factors before investing in hybrid funds.
Know the risk
It would be unwise to presume that hybrid funds are risk-free. Any product that invests in equity markets carries a certain amount of risk. While it may be less hazardous than pure equities funds, investors should follow prudence, and regular portfolio rebalancing is required when it comes to hybrid funds.
Do not assume guaranteed returns
The performance of these funds’ underlying securities has an effect on their Net Asset Value (NAV). As a result, it may change in response to market fluctuations. Additionally, these asset management companies may refrain from declaring dividends during market downturns.
Check the expense ratio
Hybrid funds would charge an expense ratio for managing your portfolio. Prior to investing in a hybrid fund, verify that it has a lower expense ratio than comparable funds, which can translate into higher take-home returns for the investor.
Investment period
Hybrid funds are better options for investors with a five-year investment horizon. If you want to earn an interest rate that is risk-free, you can invest in arbitrage funds. They bet on the price differentials between securities traded in different marketplaces.
Financial Objectives
You can use hybrid funds to fulfill intermediate financial goals such as purchasing a car or supporting higher education. Retirement investors, too, invest in balanced funds and select dividend-paying stocks to augment their post-retirement income.
Tax benefit
Hybrid funds’ equity component is taxed similarly to equity funds. Long-term capital gains on equity components (LTCG) exceeding Rs.1 lakh are taxed at a rate of 10%. Short-term capital gains (STCG) are taxed at a 15% rate. Hybrid funds’ debt component is taxed similarly to regular debt funds. You must include these profits in your income and pay taxes on them according to your income bracket. LTCG derived from debt is taxed at a rate of 20% after indexation and 10% without indexation.
It would be unwise to presume that hybrid funds are risk-free. Any product that invests
in equity markets carries a certain amount of risk
DAAF
For those investors who fear steep market falls, and they may not have the resilience to hold on to their equity investments, readymade hybrid solutions like Dynamic Asset Allocation Funds (DAAF) automatically adjust the allocation to equity and debt on the basis of market valuation, are an apt choice.
In short, they are for those kinds of investors who do not wish to actively track the markets and rebalance their portfolio allocation as DAAF funds do this automatically.
As per the Hybrid Funds Table Returns, all hybrid funds have clocked a double-digit growth and above 20% returns except the Arbitrage fund.