Hybrid funds are popular among investors for the fine balance they offer between risk and reward. They invest both in equity and debt to chase 'higher than debt' returns while keeping the risks low.
There are sub-categories within hybrid funds including aggressive hybrid, balanced advantage and equity savings, which are most popular among investors. The choice between the three should depend on the investment horizon and the risk-taking ability of the investor.
What is equity savings funds?
Equity savings fund is the most conservative hybrid strategy among the three. These schemes invest 30-40% in equities, 25-35% in equity arbitrage and the rest 25-35% in debt.
The use of arbitrage strategy makes it a unique offering in the hybrid space. The structure helps it to provide the benefit of equity taxation at a much lower risk compared to other equity dominated funds.
What are the major advantages?
Low volatility: High exposure to debt and arbitrage keeps the returns somewhat stable compared to equity heavy hybrid funds like aggressive hybrid funds.
Tax efficiency: As equity saving scheme is treated as an equity fund, the taxation is lower compared to debt funds.
Diversification: Risk averse investors can get the benefit of diversification through this fund as it provides exposure equity, debt and arbitrage opportunities.
Who should invest?
Investors looking for decent returns without venturing into high risk funds should consider equity savings as an option. Due to the tax-efficiency, it should be the preferred hybrid category for conservative investors. Even retirees, who are open to taking limited exposure to equities, can consider investing in these funds.
"Different hybrid funds have different risk levels. In equity savings fund, the risk is on the lower side. You should consider this fund when you desire decent returns but do not want to take much risk," said Mahendra Jajoo, Head - Fixed Income, Mirae Asset MF.
Due to low equity exposure, the fund seems suitable for short to medium term goals, where the investment horizon is between 2-4 years.
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