|hybrid fund||2,400||Fixed income funds||480|
|hybrid funds||1,900||debt funds||14,800|
|hybrid mutual funds||1,300||debt mutual funds||6,600|
|balanced fund||2,400||best debt mutual funds||2,900|
|balanced mutual funds||880|
Retail investors in India have traditionally associated mutual funds mostly with equity investments. According to AMFI data, retail and HNI assets under management (AUM) in equity oriented mutual fund schemes was more than 80% of total retail and HNI AUM on 31st March 2022. Since investors associate mutual fund investment primarily with equities, a large percentage of investor’s wealth remain invested in traditional fixed income investments e.g. bank FDs, Government Small Savings Scheme etc. You should know that mutual funds like debt funds and hybrid funds offer investment solutions across asset classes e.g. equity, fixed income, gold etc, for investors with different risk appetites.
Debt mutual funds or fixed income funds are mutual fund schemes which invest in debt and money market instruments like TREPs, CPs, CDs, T-Bills, Corporate Bonds (NCDs), SDLs, Gilts (G-Secs), FRNs etc. The primary investment objective of debt funds is income generation. Debt mutual funds offer solutions for wide variety of investment needs e.g. investment tenures ranging from a few days to 3 years plus and risk appetites e.g. low risk to moderate risk. Debt funds with shorter durations (e.g. overnight, liquid, ultra-short duration funds etc) have lower interest rate risk compared to funds with longer duration (e.g. long duration, dynamic bond, gilt funds etc). Interest rate risk increases as durations increase. There are also debt funds of different credit qualities. Funds of lower credit quality give higher yields but have higher credit risks and vice versa.
Debt mutual funds can provide higher returns than traditional fixed income investments for investors with suitable risk appetites. Even though debt mutual funds do not assure capital protection or guaranteed returns, they can help you can take advantage of current market yields and interest rate movements. Debt funds also offer tax advantage over 3 years+ investment tenures for investors in higher tax brackets. Long term capital gains (3 years+ investment tenures) are taxed at 20% after allowing for indexation benefits.
Hybrid funds are mutual fund schemes which invest in multiple asset classes e.g. equity, fixed income, gold, REITs etc. Hybrid funds are also known as balanced funds. The main benefit of hybrid mutual funds is asset allocation by diversifying across asset classes. The investment objective of hybrid fund is both capital appreciation and income generation. Hybrid funds offer investment solutions for a range of risk appetites. The risk profile of a hybrid fund depends on its asset allocation. Aggressive hybrid mutual funds invest 65 – 80% in equities and the balance in debt, while conservative hybrid funds invest 75 – 90% in debt and the balance in equities. Multi-asset allocation funds give you exposure to two or more asset.
One of the main advantages of hybrid funds or balanced mutual funds is taxation. Hybrid mutual funds with 65% gross equity exposures enjoy equity taxation even though it invests in debt. Hybrid funds can reduce risk further through arbitrage and still enjoy equity taxation. However, you should know that not all hybrid funds have equity taxation. Another advantage of hybrid funds is automatic rebalancing. Rebalancing reduces risk and potentially can generate risk adjusted returns for investors.
You should invest in the right debt fund or hybrid fund according to your investment needs and risk appetite. Consult with your financial advisor if you need help.