Know About Equity Mutual Funds and its Types

In the past decade, mutual funds have become a popular choice for investors of all types. These investment vehicles pool funds from multiple investors and diversify them across various asset classes. With a wide range of mutual fund types available, you can select one that matches your investment goals, risk tolerance, and time horizon, making them an attractive investment option.

Let’s explore Equity Mutual Funds, which offer the benefits of combining two asset classes within a single fund.

In order to understand Equity Hybrid Funds, it’s essential to grasp the concept of Hybrid Funds first. Hybrid Mutual Funds combine investments in both debt and equity instruments. The mix of equity and debt varies among different Hybrid Funds. Specifically, an open-ended Hybrid Fund with a higher proportion of equity than debt is known as an Equity-oriented Hybrid Fund or Equity Hybrid Fund. Because these funds tend to invest aggressively in high-risk equities across various market capitalisations and sectors, they are sometimes referred to as Aggressive Hybrid Funds.

An Equity Hybrid Fund typically invests at least 65% of its assets in equities and equity-related instruments. The remaining portion is allocated to debt instruments, including debt-related and money market instruments. The equity portion aims to provide long-term capital appreciation, while the debt portion offers a steady income. The fund manager adjusts the portfolio based on market conditions to balance growth and stability.

Ideal for Young Investors

Equity hybrid funds offer a balanced approach for those new to investing. While pure equity investments are high-risk and require careful market timing, equity hybrid funds are less volatile. This makes them a suitable choice for first-time investors looking for a more stable entry into the market.

Effective Asset Allocation

The fund manager handles asset allocation With equity hybrid funds, creating well-diversified portfolios. This is beneficial if you lack the time or expertise to analyse market trends and select investments that match your risk tolerance.

Read more about asset management here.

Regular Income

Some equity hybrid funds are invested in debt securities, such as government and corporate bonds. These debt components provide a steady income stream, complementing the equity investments and adding stability to your returns.

Investment Horizon

Like other equity funds, hybrid equity funds show convincing performance over the long term. Investing in hybrid equity funds for 3 to 5 years is typically recommended to achieve optimal returns.

Risk Appetite

Hybrid funds blend characteristics of both equity and debt funds. While these funds invest significantly in equities, exposing you to market, sectoral, and unsystematic risks, the debt component helps mitigate some risks. However, overall risk remains a factor. The best hybrid funds are those that align with your risk tolerance.

Taxation

Equity hybrid funds primarily invest in equities, so they follow the taxation rules for equity funds. However, they also include debt securities and are subject to debt fund taxation rules.

Equity Portion:

• Long-term Capital Gains: Gains from investments held for over a year are considered LTCG. These are taxed at 12.5% if they exceed ₹1.25 lakh.
• Short-term Capital Gains: Gains from investments held for less than a year are classified as STCG and taxed at 20%.

Debt Portion:

• Long-term Capital Gains: Gains from investments held for over 3 years are taxed at 20%, with the benefit of indexation.
• Short-term Capital Gains: Gains from investments held for less than 3 years are taxed according to your Income Tax slab rate

If you wish to buy Mutual Fund shares, you need a Demat Account. HDFC Bank offers a hassle-free way to apply for this account online and from the comfort of your home.

Open a Demat Account with HDFC Bank to benefit from Mutual Fund investments. Click here to get started!

*Terms and conditions apply. This is an information communication from HDFC Bank and should not be considered as a suggestion for investment. Investments in the securities market are subject to market risks; read all the related documents carefully before investing.