Mutual Fund

Khushal Rathi: After the recent mutual fund categorisation, there are four types of hybrid funds in the market. How are they different and where should we invest?

Dhaval Kapadia, Director ( Portfolio Specialist) at Morningstar Investment Adviser India, replies: Hybrid funds are differentiated based on their asset allocation mix, mainly equity and debt. Some funds can also invest in other assets such as gold. There is the conservative hybrid, which has 10-25 per cent in equity and the rest in debt instruments. A balanced hybrid fund comes with 40-60 per cent in equity and the rest in debt. An aggressive hybrid has 65-80 per cent in equity and the rest in debt.

And finally, you have dynamic asset allocation/balanced advantage where there is no set limit on equity and debt exposures.

You will also find equity savings funds, with a minimum 65 per cent in equity, of which a certain portion is hedged and the rest is in debt. Plus, there are arbitrage funds, which follow the arbitrage strategy in equity instruments, and multi-asset funds, which can invest in three asset classes, with a minimum 10 per cent in each. As the proportion of equity in a fund increases, its expected returns and risk also go up. So, the investment choice largely depends on an investor’s risk profile. Taxation can be a secondary consideration as funds with a minimum 65 per cent in equity are considered as equity funds and attract the capital gains tax akin to equity funds. For the rest, taxation is similar to debt funds.