A beginner’s guide to mutual funds - 9

Hybrid schemes, as their name suggests, invest in a mix of equity and debt. The aggressive ones invest more in equity, whereas the conservative hybrid schemes invest more in debt instruments.

You have six hybrid schemes to choose from based on your risk appetite: conservative hybrid scheme, balanced hybrid scheme, aggressive hybrid scheme, balanced advantage or dynamic asset allocation scheme, multi asset allocation scheme, arbitrage funds, and equity savings scheme. Don’t get the large number of hybrid schemes scare you. It is rather easy to choose a scheme based on your risk profile and investment horizon.

Arbitrage funds, as the name suggests, looks to the arbitrage opportunities between the cash and derivative markets. The biggest advantage of these schemes is their taxation. They are taxed like equity mutual funds, and that make their ideal to park money for a year. If equity investments are sold before a year, the short term gains are taxed at 15 per cent. If you park the money in debt mutual funds and sell it before three years, the gains would be added to your income and taxed as per the income tax slab applicable to you.

The names of these schemes says it all: if you want to take a small exposure to equity (10-25%), you should opt for conservative hybrid schemes. If you want to take a little more exposure (40-60%), you can choose balanced hybrid schemes. Aggressive hybrid schemes invest around 65-80% in stocks. Note, both the conservative and balanced schemes would be treated like debt mutual funds for taxation, while aggressive hybrid schemes are taxed like equity mutual funds.

If you can’t make up your mind about how much equity exposure to take, leave it to the fund houses and bet on balanced advantage or dynamic asset allocation funds. These schemes’ allocation to equity is linked to some valuation or in-house parameters. So, when the market goes up, their equity allocation goes down and vice versa.

If you want to park the money for a short period, but still want taxation of equity mutual funds, your should bet on equity savings funds. These schemes invest in a mix of equity, arbitrage opportunities and debt instruments. The equity and equity arbitrage would be kept above 65% to be treated as equity mutual fund for taxation.

Also read:
A beginner’s guide to mutual funds - 1
A beginner’s guide to mutual funds - 2
A beginner’s guide to mutual funds - 3
A beginner’s guide to mutual funds - 4
A beginner’s guide to mutual funds - 5
A beginner’s guide to mutual funds - 6
A beginner’s guide to mutual funds - 7
A beginner’s guide to mutual funds - 8