What are the key differences between equity debt and hybrid fund

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In the gamut of mutual funds, one of the big advantages is the wide variety of funds you get to choose from. If you want to invest in the equity market indirectly, there are equity funds of different types. If you want a low risk product, then there are debt funds. Of course you can also combine the two with hybrid funds. Typically, a hybrid equity fund or an equity hybrid fund is an amalgam of equity and debt in different proportions based on whether the investors needs an aggressive solution or a conservative solution

Did you know that if a hybrid fund has more than 65% exposure to equities, then it is classified as an equity fund for tax purposes. However, for the purpose of our understanding of fund categories, we will follow the SEBI definition of different categories of funds. Here we look at in detail at the difference between equity fund and hybrid fund. For greater clarity, we also compare and contrast equity funds, debt funds and hybrid funds based on their essential features, their categories and finally whom it is suited to.

Understanding equity mutual fund schemes

What do we really understand by an equity fund. As per SEBI definition, an equity fund scheme is a scheme that primarily and predominantly invests in equities and equity related instruments. The idea here is to seek long term capital appreciation and long term wealth creation. Such equity funds may be volatile in the short term.

Let us look at the different category of equity funds available in India.

 

Equity Fund Type

 

Investment Rationale of the Fund Category

Multi Cap FundAt least 65% of the portfolio  must be invested in equity and equity related instruments. Now multi-caps have base minimum criteria for large caps, mid-caps and small caps.
Flexi Cap FundThis is a version of multi-cap funds where the fund manager is free to allocation across large caps, mid-caps and small caps.
Large Cap FundAt least 80% investment must be in large cap stocks, defined by SEBI as the top 100 stocks on NSE/BSE ranked by market cap
Large & Mid Cap FundThis is a new category where at least 35% investment must be in large cap stocks and at least 35% in mid cap stocks.
Mid Cap FundAt least 65% portfolio must be in mid cap stocks. Mid-cap stocks are defined as rank 101 to 250 in the market cap rankings.
Small cap FundAt least 65% portfolio must be in small cap stocks. Small caps are defined as rank 251 and below in the market cap rankings.
Dividend Yield FundPredominantly invest in dividend yielding stocks, with at least 65% in stocks
Value FundValue investment strategy of buying under-valued stocks based on P/E ratio, with at least 65% in stocks
Contra FundScheme follows contrarian investment strategy (to be defined by the fund) with at least 65% in stocks
Focused FundFocused funds cannot hold more than 30 stocks in the portfolio and must have minimum 65% in equity and equity related instruments
Sectoral/ Thematic FundAt least 80% investment in stocks of a particular sector/ theme
ELSSAt least 80% in stocks in accordance with Equity Linked Saving Scheme, 2005, with mandatory 3 years lock-in for tax benefits

For whom is the equity fund suitable. It depends on waiting period and risk appetite. Equity mutual funds can be volatile in short term. Only for investors with perspective of 7-8 years or more. Equity funds call for higher risk appetite. It is an important tool of financial planning especially for meeting long term financial goals.

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Understanding Debt mutual fund schemes

What do we understand by debt fund. As per SEBI definition, debt funds invest primarily in short term and long term bonds issued by the government or corporates. Debt funds are about stability, lower risk and regular earnings. Debt funds in India are classified by duration and by credit quality.

Let us look at the different category of debt funds available in India.

Debt Fund Type

Investment Rationale of the Fund Category

Overnight FundOvernight securities having maturity of just one day
Liquid FundDebt and money market securities with maturity of up to 91 days only. This is normally a treasury product for corporates
Ultra-Short Duration FundIt invests in debt and money Market instruments with duration of the portfolio between 3 months and 6 months
Low Duration FundIt invests in debt and money Market instruments with duration of the portfolio between 6 months and 12 months
Money Market FundThese funds typically invest in money market instruments having maturity of up to 1 Year
Short Duration FundIt invests in debt and money Market instruments with duration of the portfolio between 1 year and 3 years
Medium Duration FundIt invests in debt and money Market instruments with duration of the portfolio between 3 years and 4 years
Medium to Long Duration FundIt invests in debt and money Market instruments with duration of the portfolio between 4 years and 7 years
Long Duration FundIt invests in debt and money Market instruments with duration of the portfolio above 7 years
Dynamic BondThis is a discretionary fund with no limits and allows investment across durations ranging from short to long duration
Corporate Bond FundIt invests minimum 80% investment in corporate bonds only in AA+ and above rated corporate bonds
Credit Risk FundThis is a high risk and lower quality fund with 65% investment in corporate bonds, but only in AA and below rated corporate bonds
Banking and PSU FundMinimum 80% in Debt instruments of banks, Public Sector Undertakings, Public Financial Institutions and Municipal Bonds
Gilt FundMinimum 80% in the government securities or G-secs, across maturities ranging from treasuries to 10 year benchmark and more
Gilt Fund with 10 year constant DurationMinimum 80% in G-secs, such that the Macaulay duration of the portfolio is equal to 10 years with no fluctuations
Floater FundMinimum 65% in floating rate instruments. This also includes fixed rate instruments converted to floating rate exposures using swaps and derivatives. These fit in a rising interest rate scenario.

Debt funds are meant for more conservative investors. However, not all debt funds are free of risk. While G-Secs do not carry default risk, they do carry interest rate risk and inflation risk. Secondly, credit risk funds do have an element of default risk too and that has to be taken care of. People add debt fund to their portfolio to give more stability.

Understanding Hybrid mutual fund schemes

What do we really understand by a hybrid fund. Typically, as per the SEBI definition, hybrid funds invest in a combination of equity and debt. There are different levels of aggression depending on whether the hybrid is dominated by debt or by equity.

Let us look at the different category of hybrid funds available in India.

Hybrid Fund Type

Investment Rationale of the Fund Category

Conservative Hybrid Fund10% to 25% investment in equity and equity related instruments; and 75% to 90% in Debt instruments
Balanced Hybrid Fund40% to 60% investment in equity and equity related instruments; and 40% to 60% in Debt instruments
Aggressive Hybrid Fund65% to 80% investment in equity and equity related instruments; and 20% to 35% in Debt instruments
Dynamic Asset Allocation or Balanced Advantage FundsBAFs invest in equity and debt and both can range from 0% to 100% at the discretion of the fund manager 
Multi Asset Allocation FundIt invests in at least 3 asset classes with a minimum allocation of at least 10% in each asset class
Arbitrage FundArbitrage fund is a treasury instrument which cerates risk-less arbitrage by buying equities and selling futures
Equity SavingsHas 65% in equity and equity related instruments and 10% in debt, with allocation to F&O too

Hybrid funds are gaining popularity in India and is used by many investors as a temporary option while shifting from equity to debt or vice versa.

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