What are the different kinds of Hybrid funds in MF? How they are different? What is applicable tax towards these?
Hybrid funds are the schemes which has equity, fixed-income and sometime other asset class in the portfolio. Mix of these asset class can be different, so accordingly they are categorized in different schemes and applicable for different taxation.
Let me explain benefits of Hybrid funds.
1-
Biggest benefits of investing in Hybrid fund is regular
rebalancing of portfolio.
When equity market goes up, equity portion of portfolio grows and it
become higher percentage of portfolio. Then fund manager sells equity
shares and buy fixed-income papers. Means profit booking.
Similarly
if equity market corrects (goes down), then fund manager has to sell
fixed income papers and buy equity to make it again at least 65 % of
portfolio (as per regulatory requirements). Means cost averaging.
2- It has lower volatility than pure equity portfolios.
3- these funds required almost no market timing for entry and exit.
We
can broadly classify Hybrid
funds in 4 categories.
Aggressive
Hybrid funds-
As name suggest, these are aggressive funds which has more than 65%
Equity in portfolio (Equity taxation- as it has more than 65%
portfolio in dimestic equity) and remaining in Fixed Income portfolio
(and mostly in high quality-medium duration portfolio). We also known
these schemes as plain vanilla balance funds. As they have least
2/3rds of portfolio in equity, they are the most volatile among
Hybrid funds.
Because
of above higher equity portion, most of these aggressive funds
deliver similar returns to any large cap category funds with lesser volatility.
Dynamic Asset Allocation- This is the category of scheme which keep changing their net-equity position of portfolio as per market valuation. Idea is to increase equity percentage in portfolio when market looks under valued and similarly decrease equity weight when market look expensive.
Most of the funds in this category uses either PE ratio of PB ration to determine valuation of equity market and their net-equity portfolio keep changing from as low as 10% to as High as 90 %.
Remaining portion of the portfolio has arbitrage and fixed-income papers (in efficient combination to qualify Equity taxation).
Conservative Hybrid funds- These funds have very high amount of fixed-income papers and a small percentage (most case 20 to 25%) is equity. These funds are liable for debt taxation.
Equity Saving fund – These funds broadly follow principle of one third to each asset class (Equity, arbitrage and fixed-income). This composition might change slightly depending upon market outlook of fund manager. This fund also qualify for equity taxation.
Allocate your funds in these categories as per your requirements.
