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What are Hybrid Funds, Equity Saving Fund and Asset Allocation Funds?

Can someone please explain to me what are these funds and what are the main differences? Hybrid funds, equity saving fund and asset allocation funds?

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3 Approved Answers

Arpit Chandak

All these funds categories of mutual funds in which the capital of the investor is diversified across different financial instruments such as stocks, bonds, debt securities, etc to limit the risks. Each of these funds has different composition. 

Balanced funds:

  • These funds are considered ideal for investors who want to invest in stock market and at the same time keeping the overall risk level low.
  • The equity component of the portfolio gives the investor the opportunity for growth whereas the debt component balances the risk of the investment.
  • Equity oriented: When major part of the capital is invested in the equity market and the rest in debt funds, these funds are called equity oriented balanced funds. These portfolios of these funds comprise of at least 65 % of the equity funds and the rest of the funds are invested in the debt funds to minimize the risk.
  • Debt oriented: When major part of the capital is invested in the debt securities and the rest in equity market, these funds are called debt oriented balanced funds.

Equity savings funds:

  • Equity Savings Fund typically invests the total capital in three segments- pure equity, arbitrage and debt funds.
  • Generally, one-third of the total capital in pure equity, one-third in debt funds and the balance in arbitrage funds. However, the composition varies from fund to fund. The equity component can vary from 20-40% approx and depends on the type of mutual fund.
  • These funds outperform debt funds over taxation and treated as equity funds for taxation. If sold before a year, short term capital gains are taxed at 15% and if sold after a year, no tax is levied on the gains.

Asset allocation funds:

Asset allocation funds are similar to balanced funds where capital is diversified across various asset classes to minimize the risk exposure.

They are broadly classified into two categories:

  • Dynamic asset allocation funds: These funds keep changing the proportion of the assets in the portfolio as per the market fluctuations.
  • Static asset allocation funds: These funds have a pre-decided proportion for the different assets in the portfolio. They can be more risky in volatile markets.

All the above mentioned categories of mutual funds basically differs in their allocation percentage in different funds. Hence, the risks and returns varies as per the components of the fund.

Kavita Soni

Hybrid mutual funds or balanced funds are the funds which invest in a combination of categories like large cap, small cap, mid cap and debt instruments. Some of the key features of these funds are:

  • Risk minimization as compared to pure equity investments
  • Better returns for debt securities
  • Carry higher risk as compared to debt funds

Example:

HDFC Balanced Fund

Equity saving fund is different from balanced funds as they invest 60-70% of the amount in equity and the remaining in fixed income instruments. While the percentage of equity investments in hybrid funds depend on the asset allocation. The percentage can be higher for equity or debt.

Key features of this fund are:

  • Generate returns from equities, arbitrage funds, and fixed income securities
  • Some portion of the fund is hedged using derivatives while some remains unhedged to realize the equity returns
  • It is different from equity fund in the sense that it provides stability and tax efficiency

Examples:

L&T Equity Savings Fund

Tata Regular Saving Equity Fund

Asset allocation funds as the name suggests adjust the percentage allocation of fixed and variable income securities based on market conditions. Hybrid funds and equity saving funds are types of asset allocation funds.

Diversifying the investments across multiple asset classes helps earn consistent returns and also allows to mitigate risks. Assets can be equity-oriented, debt-oriented or even other asset classes like gold, other metals and commodities.

Dynamic asset allocation funds allow changing the proportion of assets based on market performance while static asset allocation funds carry a pre-defined percentage for assets.

Examples:

Union Asset Allocation Fund

IDFC Asset Allocation FoF

Ankit

A hybrid fund is an investment fund which is diversified among 2 or more asset classes. It is also known as Asset Allocation Fund.

Hybrid funds or the balanced schemes invest into a mix of equity and debt. Equity-oriented hybrid schemes invest at least 65 per cent of the corpus in equity. These schemes are less volatile than pure equity funds because of their mixed portfolio. The debt investments provide stability in times of volatility.

These funds are suitable for novices in the stock markets and very conservative equity investors.

Equity Savings Fund is a new variant of mutual fund wherein investments are made in equity, debt and arbitrage.

People are now looking for alternate investing avenues in place of fixed deposits. The investors looking to take lit bit more risk as compared to fixed deposits ae now investing in equity savings fund. Equity savings funds invest the total corpus in three parts: one-third in debt, one-third in arbitrage and one-third in pure equity. 

Since one third investment is made in equity, it makes equity savings fund less risky. Return of around 8 to 9% is expected from the fund. Since this fund has equity, holding period is 1 year i.e if fund is held for 1 year then LTCG is exempted and if held for less than 1 year then STCG is taxed at 15%.

Few good hybrid and equity savings fund to invest in are:

Mutual fund investments are subject to market risks. Please read the scheme information and other related documents carefully before investing.
Past performance is not indicative of future returns. Please consider your specific investment requirements, risk tolerance, investment goal, time frame, risk and reward balance and the cost associated with the investment before choosing a fund, or designing a portfolio that suits your needs.
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