Best Balanced Hybrid Mutual Funds

You can consider investing in balanced hybrid mutual funds if - 

• You are a beginner—these mutual funds offer an easier entry into the market. The addition of debt instruments lowers the volatility linked to pure equity funds for beginners. 
• You want a more balanced investment portfolio - If you wish to diversify your portfolio with a single fund, this may be a good choice. Your fund will be actively managed by a professional manager who allocates assets throughout multiple classes. This reduces the risks typically associated with relying on a single asset type.
• You have a moderate risk appetite—if you can tolerate periodic equity fluctuations but want more stability than pure equity funds offer, this may be a good option. The mix of assets may help you get moderate yet consistent returns. 
• You are a senior or retiree—If you are retiring and want a steady income with capital preservation, balanced hybrid mutual funds are worth considering. They cushion you against market volatility, while offering future growth potential.
• You don’t want to manage the investment actively—professional fund managers manage these funds. This frees you from the time and energy needed to track and manage the portfolio.

Factors to Consider Before Investing in Balanced Hybrid Mutual Funds

Here are some of the things to consider before you invest in a balanced hybrid mutual fund:

• Fund goals: Make sure you understand the fund's primary goal, as defined by its asset allocation. 
• Asset allocation and risk profile: You should carefully check the fund's debt-to-equity ratio and the resulting risk quotient. This is usually 40-60% for both debt and equity in these funds.
• Aggressive hybrids: These are funds with a higher equity allocation of 65-80% for higher future growth potential. However, the risks are also higher in turn. 
• Conservative hybrids: These funds have 75-90% debt allocation and are designed to offer lower risk and greater stability. 
• Static and dynamic allocation aspects: Some funds may offer the flexibility to adjust the mix of debt and equity dynamically. This is usually done based on the market conditions. Check this aspect carefully before investing. 
• Track record: You should continually evaluate the fund's past performance, ensuring it consistently surpasses its peers and benchmark over 3-5 years. 
• Fund manager: The experience and track record of the fund manager also matter when choosing the right balanced hybrid fund.
• Taxation and costs: Check the expense ratio and compare it across similar funds. Also, carefully review the tax implications. 
• Investment horizon: Balanced hybrid funds are more suitable for medium-term objectives of 3 to 5 years. 
• AUM: Any fund’s AUM (assets under management) is a key criterion worth considering for your investment. 

Major Advantages of Investing in Balanced Hybrid Mutual Funds

Some of the advantages of investing in balanced hybrid mutual funds include: 

• Balancing Income & Growth: The equity component of the fund will give you capital appreciation. On the other hand, the debt portion will offer consistent income with lower risks. 
• Diversifying the Portfolio: You can use these funds to invest across multiple asset classes and reduce the risk associated with a single asset. 
• Higher Stability: In comparison to pure equity funds, these funds give you a more stable investment option. 
• Reduced Volatility: The fund's fixed-income component will cushion you against market downturns. This lowers volatility in comparison to pure equity funds. 
• Better Management: Your balanced hybrid mutual fund will be professionally managed. He/she will rebalance your portfolio and maintain the proper asset allocation in line with evolving market conditions. 
• Ideal for Medium or Long-Term Objectives: You can use these funds to meet specific financial goals with 3-5-year timelines. These may include saving for your down payment on a home, setting up a retirement fund, or even buying a vehicle.

Risks Involved While Investing in Balanced Hybrid Funds

Some of the risks of investing in balanced hybrid funds include: 

• Moderate or lower returns: The returns of these funds may be lower than those of pure equity funds in bull markets (owing to the debt component).
• Lack of control: You cannot fully customise the asset allocation. The fund manager's decisions will ultimately count. 
• Higher expense ratios: These are actively managed funds, and the expense ratios may be higher. They may impact your long-term returns.
• Taxation aspects: Based on the debt-to-equity ratio, the taxation rules may differ for STCG and LTCG. It may lead to greater complexity than pure debt or equity funds.
• Interest and credit risks: Interest rate fluctuations may impact the value of your debt portfolio. At the same time, credit risk involves the possibility that debt securities will default on payments or fail to return principal. 
• Liquidity and other risks: The credit rating of the issuing company may be downgraded, potentially lowering the value of your fund. The fund may also be unable to sell off assets swiftly or without a significant price drop. This may, in turn, lead to liquidity risks. 

Taxation of Balanced Hybrid Mutual Funds

When it comes to the taxation of balanced hybrid mutual funds, here are some key pointers that are worth noting: 

• Equity-oriented funds:
  For funds with more than 65% allocation to equity, the STCG (for holdings of 12 months or less) will be 15%. The LTCG (held for more than 12 months) will be 10% for amounts exceeding ₹1 lakh. 
• Debt-oriented funds:
  STCG (held for 24 months or less) will be taxed as per the individual income tax slab rate. LTCG (more than 24 months) will be 20% with indexation.