October 24, 2021

Individuals who wish to invest a portion of their hard-earned money in investment schemes must first understand financial planning in the best possible way. Financial planning asks investors to determine their appetite for risk as well as prioritise their life’s urgent goals so that they are able to diversify assets accordingly. Every investment scheme has some risk associated with it. Even conservative schemes offering fixed interest rates cannot be deemed entirely risk free. If you are someone who is young with an aggressive investment approach and long-term investment horizon, such individuals can consider investing their hard-earned money in market linked schemes like hybrid funds.

Hybrid funds are gaining traction among retail investors because they have a slight upper hand over other equity schemes. While equity schemes predominantly invest in equity and equity related instruments, hybrid funds follow a unique asset allocations strategy where the fund manager builds portfolio by investing in both equity and debt instruments. Multi asset allocation strategy usually works because equity as an asset class is known to get affected by the fluctuations in the market. When the markets are volatile and this leads to the equity portfolio to underperform, investments in the debt can add the necessary cushion.

Things to consider before investing in hybrid funds

Hybrid schemes invest in different asset classes, thus aiming to provide the right amount of diversification for investors. However, here are some of the factors to bear in mind before investing in hybrid schemes –

Decide which hybrid scheme to invest in – The investment strategy of every hybrid scheme varies depending on its investment objective. If you carry a high risk appetite, then an aggressive hybrid scheme might be more apt as it invests more in equity and the rest in debt. Similarly, a conservative hybrid fund is more debt oriented and invests 15 to 20 percent in equity. Investors should choose a hybrid that suits their investment objective and shows growth potential to target their financial goals.

Capital gains tax – The equity component of hybrid funds is taxed like equity funds. Capital gains from the equity component of hybrid funds is eligible for short term capital gains tax of 15 percent and long term capital gain tax of 10 percent (for gains exceeding Rs. 1 lakh). The debt component of hybrid schemes is applicable for a short term capital gains tax is applicable as per your income slab. A long term capital gain tax of 20 percent is applicable after indexation benefit and 10 percent without indexation.

Risk appetite – Hybrid schemes invest in securities whose performance may fluctuate depending on the fluctuating market trends. Such investments are high risk and over the short term, you may even face losses. This is why investors should ideally determine their appetite for risk and evaluate whether investing in hybrid funds suits their income needs.

Investment horizon – Since these are equity oriented schemes, investors should understand that they need to have a minimum investment horizon of 7 to 10 years. Investing in hybrid schemes for the short run will not only shun their chance of earning capital gains, but they might even lose out of their investment amount. Hence, it is better to keep a long term investment horizon while investing in hybrid funds.

SIP or lump sum? – Investors need to determine whether they want to make a onetime investment or start a monthly SIP in hybrid funds. Systematic investment plan ensures that you save and invest a fixed amount at periodic intervals. Investors can also refer to SIP calculator, a free online tool which lets them determine the overall wealth (approximate) which they will accumulate through SIP investing.   

Steve Campbell

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