What Are Debt And Hybrid Mutual Funds?
Investors should know that mutual funds also offer debt funds and hybrid funds solutions.
Retail investors in India traditionally associate mutual fund investment with equity investments. Since investors associate mutual funds primarily with equities, a large percentage of investor’s wealth remain invested in conventional fixed income investments like, bank, fixed deposits, and Government small savings scheme etc. However, investors should know that mutual funds also offer debt funds and hybrid funds solutions for investors with different risk profiles.
Debt funds
Debt funds, also known as fixed income funds are mutual funds which invest in debt and money market instruments like TREPs, CPs, CDs, T-Bills, Corporate Bonds (NCDs), SDLs, Gilts (G-Secs), etc. The primary investment objective of debt funds is income generation. These funds offer solutions for wide variety of investment needs e.g. investment tenures ranging from a few days to many years and risk appetites e.g. low to moderate to moderately high risks. Debt funds with shorter durations (e.g. overnight, liquid, ultra-short duration funds etc.) have lower interest rate risks compared to funds with longer duration (e.g. long duration, dynamic bond, gilt funds etc). Interest rate risk increases as durations increases. There are also schemes falling in debt funds category which have different credit qualities. Funds of lower credit quality may give higher yields but may also have higher credit risks and vice a versa.
Some of the popular debt fund categories are liquid funds, overnight funds, ultra short-term funds, short term funds, corporate bond funds, dynamic bond funds and low duration funds.
Why investors invest in debt funds is because it can provide higher returns than traditional fixed income investment options like saving bank and fixed deposits, etc. Even though debt funds do not assure capital protection or guaranteed returns, investors can take advantage of current market yields and interest rate movements.
Hybrid Funds
Hybrid funds are mutual fund schemes which can invest in multiple asset classes e.g. equity, fixed income, gold, silver, REITs etc. Hybrid funds are also known as balanced funds. The main benefit of hybrid funds is asset allocation by diversifying across asset classes thus providing solutions to varied investment risk profiles. Capital appreciation and income generation is the main investment objective of hybrid funds.
Let us see example of some hybrid funds and their exposure to various asset classes –
Aggressive Hybrid Funds - Equity & Equity related instruments - between 65% and 80% of total assets; Debt instruments- between 20% 35% of total assets.
Dynamic Asset Allocation or Balanced Advantage Funds - Investment in equity/ debt that is managed dynamically. Mostly these hybrid funds try to keep at least 65% average assets so as to avail the equity taxation benefit.
Multi Asset Allocation - Invests in at least three asset classes with a minimum allocation of at least 10% each in all three asset classes.
Arbitrage Fund - Scheme following arbitrage strategy. Minimum investment in equity & equity related instruments up to 65% of total assets to avail the equity taxation benefit.
Equity Savings - Minimum investment in equity & equity related instruments- 65% of total assets and minimum investment in debt- 10% of total assets Minimum hedged & unhedged to be stated in the SID.
One of the main advantages of hybrid funds is taxation. Some of the hybrid funds with 65% gross equity exposures enjoy equity taxation even though it invests in debt or other assert classes.
We discussed debt funds and hybrid funds in this piece. Investor should invest in the right category of debt funds and / or hybrid funds based on their investment needs and risk appetite.
