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Kotak e-Invest
Features
Ref. No. KLI/22-23/E-BB/492
Hybrid mutual funds blend stocks for growth and bonds for stability, offering investors a balanced approach to managing risk and returns tailored to their financial goals
If you are dipping your toes into the world of mutual funds, you might have come across the term “hybrid funds.” But what exactly are hybrid mutual funds, and why are they gaining popularity among investors? Let’s break it down in simple terms and understand what is hybrid fund.
A hybrid mutual fund is like a financial smoothie—it blends different types of investments into one fund. Typically, a hybrid mutual fund invests in a mix of equities (stocks) and fixed-income securities (bonds), and sometimes even cash or money market instruments. The goal? To provide a balance of risk and return.
Hybrid mutual funds offer a versatile investment option by combining different asset classes in a single fund. They aim to provide a balance between growth and income while managing risk through diversification. Whether you’re looking for a balanced approach to investing or a fund that adapts to changing market conditions, hybrid mutual funds can be a valuable addition to your investment portfolio.
A hybrid fund is designed to offer you a steady stream of income while also giving your investments a chance to grow over time. The fund manager puts together the portfolio by deciding the right mix of stocks and bonds based on what the fund aims to achieve. Plus, they adjust these investments when the market shows potential for better returns.
Hybrid funds, or balanced funds, are an interesting blend of investments. They combine the best of equity and debt funds, offering investors a diversified portfolio that balances risks and returns. Here’s a closer look at what makes hybrid funds stand out:
Hybrid funds mix stocks and bonds to give investors both perks in one investment. This combination spreads risk across various market areas, making the portfolio safer overall while still chasing after growth chances.
In hybrid funds, a notable feature is how they balance asset allocation. Fund managers carefully split investments between stocks, which can grow quickly but come with more ups and downs, and bonds, which offer stability and steady income. This combination cushions the fund’s performance against market ups and downs.
Hybrid funds come in different types and are designed to fit various risk levels and investment goals. You’ll find funds that favor stocks, aiming for long-term growth, and others that focus more on bonds, aiming to generate income and protect your investment. Fund managers use flexible asset allocation to adapt to market changes and economic trends, ensuring your investments stay on track with current conditions.
Hybrid funds have shown they can weather market ups and downs, often delivering consistent growth over the long haul. By mixing the growth potential of stocks with the stability of bonds, these funds aim to provide reliable returns that match investors’ long-term financial aims. Their balanced approach helps smooth out the investment ride, giving a nice mix of growth and stability along the way.
Different types of hybrid funds are crafted with specific goals in mind, each tailored to match various risk preferences and financial aims. Here are a few popular varieties of hybrid mutual funds:
Multi Asset Allocation Funds spread their investments across a mix of assets like stocks, bonds, and sometimes commodities or real estate. The goal is to boost returns by tapping into different types of investments while reducing risk through diversification. They’re great for investors who want a diverse portfolio that grows steadily across various market areas.
Aggressive Hybrid Funds, also called Equity-oriented Hybrid Funds, typically invest a large chunk (usually 65-80%) in stocks, while the rest goes into bonds. These funds aim to grow your investment over time by focusing on stocks, yet they balance this with a moderate level of risk. They’re great for investors who are okay with a bit more risk and want to see their money grow in the stock market, while also enjoying some stability from bonds.
Dynamic Asset Allocation Funds, also known as Balanced Advantage Funds, can change how much they invest in stocks versus bonds depending on how the market is doing and economic signals. These funds try to make the most of good times in the market while also being careful to protect against losses. They might put more money into stocks when things are going well, and move more into bonds when the market isn’t doing as well. This balanced strategy aims to help investors grow their money while also keeping risks under control.
Conservative Hybrid Funds, also called Debt-oriented Hybrid Funds, put most of their money (usually 75-90%) into safer bets like bonds and money market instruments. These funds focus on stability and generating regular income rather than big gains. They’re great for cautious investors or folks close to retirement who want to protect their money and get a steady income.
Equity Savings Funds mix investments in stocks, bonds, and arbitrage to aim for tax-efficient returns. They balance growth potential with stocks, stability with bonds, and risk-free opportunities through arbitrage. They’re great for investors seeking tax advantages and a diversified investment approach.
Before jumping into hybrid funds, it’s important to consider a few key factors to ensure your investment strategy matches what you want to achieve financially and how much risk you’re comfortable with.
Hybrid funds’ returns depend on how they split their investments. Aggressive ones, with more stocks, can grow faster but are riskier. Conservative funds lean on bonds for stability and income. Knowing a fund’s type and how it’s performed before can give investors a clearer picture of what to expect.
Assessing risk is key when you’re investing in hybrid funds. Equity-focused ones can be riskier because they’re tied to the ups and downs of the stock market. Meanwhile, debt-focused hybrids offer more stability but can still be affected by interest rate changes and the credit health of bond issuers. Knowing your risk tolerance and picking a fund that matches your comfort zone is important to keep your investment mix in check.
The length of time you plan to invest really matters when picking the best hybrid fund. If you’re in it for the long haul, equity-focused funds are great—they give your money a chance to grow over time, even if the market gets rocky, thanks to compounding. For shorter-term goals where safeguarding your money and getting a steady income are key, debt-focused or balanced funds might be better. Matching the fund’s time frame with your financial goals can really boost how well your investments perform.
When you’re looking into hybrid funds, it’s important to factor in the expenses involved, such as expense ratios, management fees, and exit loads. While costs shouldn’t be the only factor, opting for lower expense ratios can potentially boost your long-term returns. It’s essential to grasp how these fees work and their influence on your investment outcomes to make well-informed decisions about where to invest your money
Each type of hybrid fund has its own unique investment approach determined by how it divides its investments. Aggressive hybrid funds lean towards growth by investing more in stocks to boost capital value. Conservative hybrid funds prioritize steady income and stability by favoring bonds. Dynamic asset allocation funds adapt their mix of investments to match current market trends. Picking a fund that matches your financial goals and investment style can help maximize how well your portfolio performs.
Understanding the taxation rules for equity-oriented and debt-oriented hybrid funds is essential for maximizing returns and managing tax liabilities effectively.
Equity-oriented hybrid funds typically invest a significant portion (65-80%) of their assets in equities. From a taxation perspective:
Long-term Capital Gains (LTCG): Gains from equity-oriented hybrid funds held for more than 1 year are considered long-term capital gains. As per current tax laws, LTCG exceeding ₹1 lakh in a financial year are taxed at a rate of 10% without the benefit of indexation.
Short-term Capital Gains (STCG): If units of equity-oriented hybrid funds are held for one year or less, gains are treated as short-term capital gains and taxed at 15%.
Dividends: Dividends received from equity-oriented hybrid funds are tax-free in the hands of investors. However, the fund house deducts a Dividend Distribution Tax (DDT) before distributing dividends to investors.
Debt-oriented hybrid funds allocate a larger portion (typically 75-90%) of their portfolio to debt instruments such as bonds and money market securities. Here’s how they are taxed:
Long-term Capital Gains (LTCG): Gains from debt-oriented hybrid funds held for more than 3 years are considered long-term capital gains. LTCG on debt funds are taxed at a rate of 20% with indexation benefits. Indexation helps adjust the purchase price of investments for inflation, thereby reducing the taxable capital gains.
Short-term Capital Gains (STCG): If units of debt-oriented hybrid funds are held for 3 years or less, gains are treated as short-term capital gains and taxed at the investor’s applicable income tax slab rate.
Dividends: Dividends received from debt-oriented hybrid funds are taxable to investors. The fund house deducts a Dividend Distribution Tax (DDT) before distributing dividends to investors. However, investors can claim a tax credit for the DDT paid.
1
A hybrid fund is a broader category that includes funds investing in both equity and debt, offering various risk-return profiles. A balanced fund maintains a fixed allocation between equity and debt, aiming for a stable balance.
2
The minimum investment required for hybrid mutual funds varies by fund and can range from as low as ₹500 to ₹5,000 or more, depending on the fund house and the specific scheme.
3
Yes, hybrid mutual funds can be suitable for beginners due to their balanced approach, combining equity growth potential with debt stability. They offer diversification and are managed by professionals, making them accessible for those starting their investment journey.
4
Yes, investors can switch from one type of hybrid mutual fund to another within the same fund house or between different fund houses. Fund houses typically offer the flexibility to switch funds without incurring taxes, but checking for any exit loads or transaction fees is advisable.
5
Dividends from hybrid mutual funds are taxed differently based on the fund’s asset allocation:
Amit Raje is an experienced marketer who has worked in various Fintechs and leading Financial companies in India. With focused experience in Digital, Amit has pioneered multiple digital commerce in India. Now, close to two decades later, he is the vice president and head of the D2C business department. He masters the skill of strategic management, also being certified in it from IIMA. He has challenged his challenges and contributed his efforts in this journey of digital transformation.
Prasad Pimple has a decade-long experience in the Life insurance sector and as EVP, Kotak Life heads Digital Business. He is responsible for developing user friendly product journeys, creating consumer awareness and helping consumers in identifying need for life insurance solutions. He has 20+ years of experience in creating and building business verticals across Insurance, Telecom and Banking sectors
In this policy, the investment risk in the investment portfolio is borne by the policyholder.
Kotak e-Invest
Features
Ref. No. KLI/22-23/E-BB/521
The information herein is meant only for general reading purposes and the views being expressed only constitute opinions and therefore cannot be considered as guidelines, recommendations or as a professional guide for the readers. The content has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Recipients of this information are advised to rely on their own analysis, interpretations & investigations. Readers are also advised to seek independent professional advice in order to arrive at an informed investment decision. Further customer is the advised to go through the sales brochure before conducting any sale. Above illustrations are only for understanding, it is not directly or indirectly related to the performance of any product or plans of Kotak Life.
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