Mutual fund investments are a key component of investors’ portfolios, offering them the potential to generate higher returns than investing in individual stocks or bonds. From risk diversification and professional management to cost efficiency, there are different types of mutual funds to suit different investors’ goals and objectives. Among these investors, there is an important consideration for each individual investor to make, deciding between the three major categories of mutual funds: pure equity funds, debt funds, and hybrid funds.
Each has its advantages and features in terms of risk exposure, return potential, tax implications, etc. Choosing the right option can be difficult without knowing an in-depth comparison between them both. So, let’s break down the key differences between hybrid funds vs pure equity and debt funds.
What is a hybrid fund?
A hybrid fund invests in more than one asset class, and the asset allocation may vary according to the fund’s objectives. Investors can choose from different types of hybrid funds, such as aggressive hybrid funds, conservative hybrid funds, multi-asset allocation funds, etc., depending on their risk appetite and investment goals.
What is an equity fund?
An equity fund predominantly invests in stocks or equities. Equity funds offer higher returns than other investments, such as bonds or fixed deposits, due to their higher risk profile. They are also known as “growth” funds as they aim to create capital growth over time. These funds can be further categorised based on sectoral/thematic, market cap, and tax saving mutual funds.
What is a debt fund?
Debt mutual funds invest primarily in fixed-income securities such as bonds, debentures, treasury bills, etc., which provide regular income over time. They offer lower returns than equity but carry less risk due to their low volatility. They are also known as “income” and “bond” funds, as they focus on generating regular income for investors through dividends or interest payments.
Hybrid funds vs pure equity and debt funds: Comparing features, benefits, and risks
| Parameters | Equity funds | Debt funds | Hybrid funds |
| Allocation | Stocks and equity related instruments | Invests in fixed-income instruments | Equities, debts, and other fixed-income instruments |
| Risk profile | Carry a high risk profile | Have low to moderately high risk profile | Depending on the asset allocation, they may carry low to high risk profile |
| Investment return | Returns depend on market performance | Returns can be affected from interest rate risk and credit risk | Performance of underlying securities determine returns |
| Liquidity | Highly liquid except ELSS (equity linked savings scheme) funds that come with a 3 years lock in period. | Different funds have different maturity such as overnight funds have one-day maturity, short term debt funds have 1-3 years maturity, and so on. | Liquidity can vary depending on if investor holds a debt-oriented or equity-oriented hybrid fund |
| Tax benefit | ELSS mutual funds are eligible for tax deductions of up to R.s 1.5 lakh every fiscal year | No tax exemption | Do not qualify for tax exemptions under Section 80C
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Hybrid vs pure equity vs debt funds – Which is better?
There is no one-size-fits-all when it comes to investing in mutual funds – every investor’s needs and goals are unique. While equity mutual funds provide exposure to long-term gains at the expense of higher market risks, debt funds can provide investors with relatively more safety since investments are made in fixed-income securities. Meanwhile, hybrid mutual funds offer a mix of different asset classes with different allocation strategies.
Diversifying into equity, debt funds, and hybrid mutual funds can help balance risk and reward, but selecting the right mix of funds primarily depends on individual investors’ goals, risk tolerance levels, and investment horizon.
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