Enter debt-oriented hybrid funds with a three-year minimum horizon

Hybrid funds are mutual fund schemes that provide investors with exposure to both debt and equity instruments. By combining different types of assets together in one portfolio, hybrid mutual funds aim to offer investors the potential to minimise risk on their investments while also achieving market-beating returns.  

A hybrid fund is termed as a debt-oriented fund when a majority of the fund’s assets are allocated toward debt instruments, with the remainder going toward equities. This means that these funds invest in fixed-income securities such as bonds, treasury bills, government securities, and equities such as stocks and other equity shares. 

In terms of risk profile, they are considered to be low to medium-risk investments since they provide a mix of safety (due to the debt allocation) and potential rewards (due to the equity portion). But how long should you stay invested? According to most financial experts, three years is the minimum horizon you should consider if you invest in debt-oriented hybrid funds. Let’s take a closer look at why that time frame is recommended. 

  • Taxation of capital gains

If you hold these funds for three years or more, then the gains would be considered as long-term capital gains and will be taxed at 20%. This tax rate comes with the additional benefit of indexation, which allows you to adjust their gains based on inflation rates over time.    

In addition to enjoying tax benefits, if you hold onto your investments for three years or more, you are able to take advantage of compounding benefits. As interest on your investments accumulates over time, it results in compounded growth which further increases returns on investments without any additional effort or risk involved on your part.  

  • Stability of debt investments and high return potential of equity  

Unlike pure equity funds, the major portion of debt-oriented hybrid funds’ portfolios is invested in fixed-income securities, making them comparatively stable. Additionally, the equity component provides the potential for market growth over the long term. 

The asset allocation between both equity and debt is backed by the fund manager’s expertise and oversight, allowing you to benefit from the stability of debt and anticipation of growth in equities. Therefore, you need to have medium to long-term goals before entering into these types of mutual funds to make sure they are productive within the required time frame.

A Systematic Investment Plan (SIP) is an ideal approach for investing in these funds, as it allows for a steady and regular flow of investments without having to time the markets. Also, with periodic investments, you can take advantage of rupee-cost averaging, which helps to balance out market volatility, thereby minimising your risks and increasing your overall returns in the long term.

Closing thoughts

A debt-oriented hybrid fund can be an ideal option for investors who are willing to take on some risk but don’t have the appetite to invest heavily in the stock market. These funds are less volatile than equity funds and can be expected to provide relatively stable returns over time. These funds aim to achieve capital appreciation and capital preservation through investments in both debt instruments and equities. 

Given the importance of hybrid funds in mutual fund investments, evaluating them along certain parameters is also essential. This includes checking consistency in return, track record of the fund management team, risk and return ratio performance, fund size, and expense ratio, among other factors. 

Moreover, it is always recommended to consult with a professional financial advisor when making decisions about investments, as they can provide expert advice tailored specifically to you according to your specific goals and requirements.

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