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What is the difference between hybrid funds and debt funds?

Mutual Funds have taken the Indian markets by a huge storm. As per AMFI reports for the year 2019-20, 9.83 lakh SIP accounts have been added each month! Broadly speaking, there are five categories of mutual funds for Indian investors:

  • Equity schemes, 
  • Debt schemes, 
  • Hybrid schemes, 
  • solution oriented schemes, and
  • other schemes such as ETFs, FOFs, etc.

In this article, we will compare hybrid funds and debt funds and see if one of them has an edge over the other. But before we determine if you should invest in hybrid funds or debt funds, let us look at their meaning.

Debt Funds are mutual funds which invest predominantly in debt and money market instruments. As these schemes allocate a majority of their total assets in fixed-income or interest generating instruments, they are considered a relatively low-risk investment option. Debt funds seek to generate average (but stable) income for the investors. 

Hybrid Funds are mutual funds that vest across asset categories (for instance, equity, debt, arbitrage positions, etc.). The core benefits of hybrid funds are that they seek to combine the best of both worlds – higher capital appreciation from equity exposure as well as stability through the presence of debt. They are also referred as Balanced or Asset Allocation Funds.

Comparison of Hybrid and Debt Funds

  1. Portfolio Composition

The portfolio of debt funds consists predominantly of debt and money market instruments. The benefits of Hybrid funds, on the other hand, is that they come in all shapes and sizes. For instance, aggressive hybrid funds have a higher equity exposure and a small debt allocation. Conservative hybrid funds have a significant debt presence and marginal equity exposure. As a result, regardless of your risk appetite, there will be a hybrid fund which is aligned to your investment profile.

  1. Risk

Debt funds have a low-risk profile when compared to equity funds. However, contrary to popular opinion they are not completely risk-less investments. They have three risk agents – credit risk, interest rate risk and liquidity risk. Usually, longer is the maturity period of the debt funds’ underlying instruments, higher is their risk quotient.

The risk profile of hybrid funds is derived basis its asset allocation. Schemes with significant equity exposure (such as aggressive hybrid funds) have a higher degree of risk. Schemes with majority allocation in debt instruments (such as conservative hybrid) have a lower risk quotient.

  1. Returns

Higher the risk, higher is the return. As a result, debt funds which carry relatively less risk yield low returns. However, they are usually stable in nature. 

Hybrid Funds, on the other hand, have the potential to generate higher returns by increasing their exposure.

  1. Liquidity

Debt Funds (especially Liquid or Overnight schemes) score over Hybrid Funds in this aspect. These funds are extremely liquid in nature. Some even have the provision of instant redemption. Hybrid Funds take longer to liquidate because of the presence of equity in their asset allocation.

  1. Taxation

Income Tax framework considers only two categories of mutual funds – Equity Funds or Debt Funds. Gains from Debt Funds are treated as long-term capital gains if the holding period exceeds three years. They are taxed at 20% with the benefit of indexation. Short-term capital gains from these schemes are taxed as per the applicable income tax slab (As part of your overall income).

When it comes to hybrid funds, the taxation guidelines are dependent on their asset allocation. If the scheme invests more than 65% of the total assets in equity (or related instruments), it is taxed as an equity fund. Otherwise, the tax rules for debt funds are levied.

  1. Investment Horizon

Debt Funds are a good option for short-term financial needs. Hybrid Funds are more suited for investors with a medium – long term investment horizon. This is because, equity markets are extremely volatile, especially in the long run. You need to remain invested for a significant time period (at least a full-term government) to get the maximum return on your equity investment.

Final Words

So, should you invest in hybrid funds or are debt funds? Unfortunately, there is no one answer that will apply to all investors. Active risk management, diversification and auto portfolio rebalancing are some of the key benefits of hybrid funds. On the other hand, debt mutual funds are less volatile, safer and financially more lucrative than conventional instruments such as FDs. 

The final decision (whether you invest in hybrid funds or debt, or in fact any financial instrument) your own investment profile – risk appetite, financial goal as well as investment duration. Even the best performing mutual fund may not generate the desired results for you if there is a mismatch between the scheme’s objective and your investment profile. So, align yourself and rake in the moolah!


Who Should Invest in ELSS Mutual Funds and explain Tax Implications on ELSS?

Equity Linked Saving Schemes, ELSS, are quite popular among investors. These schemes allow you to invest in equity oriented securities for good returns. The lock-in period of three years gives you the benefit of disciplined savings and the tax benefits are the icing on the cake. However, when investing in ELSS mutual funds, you should understand the fund completely. So, let’s understand what ELSS funds are, who should invest in them and their tax implications – 

What is an ELSS fund?

An ELSS fund is an equity oriented mutual fund scheme. The fund invests at least 65% of its portfolio in equity oriented stocks for maximum returns. There is a lock-in period of 3 years on ELSS investments during which you cannot withdraw or redeem the fund. ELSS funds are popular because they allow tax saving benefits on the investments.

Who should invest in ELSS mutual funds?

ELSS mutual funds might not be the best investment avenue for every mutual fund investor. You should invest in ELSS schemes if you are comfortable with the following facts –

  • You are able to take equity linked risks which the fund entails. Since ELSS is an equity oriented fund, it has investment risks in market volatility. If you have a health risk appetite, you can invest in top ELSS funds in India
  • If you do not need funds within the next three years, you can invest in ELSS schemes. Since the scheme has a lock-in period of 3 years, your investment would be locked in for the specified duration restricting your access to your investment. So, if you have no financial need in the near future you can invest in ELSS funds.
  • If you want to maximize the tax saving benefit of Section 80C, you can invest in ELSS schemes. Your investments would be allowed as a deduction from your total taxable income thereby lowering your tax liability.

So, if you want to save tax, don’t mind the investment risk and have no pressing financial need in the next three years, you can invest in ELSS schemes. 

Tax implications of ELSS funds

ELSS mutual funds are popular because of their tax saving nature. Let’s have a look into the tax benefits which the funds provide –

  • Tax benefit on investments

Investments into the ELSS scheme qualify as a tax-free deduction under the provisions of Section 80C of the Income Tax Act, 1961. You can claim a deduction of up to INR 1.5 lakhs from your taxable income under Section 80C if you invest in ELSS funds.

  • Tax benefit on returns

Since ELSS mutual funds are equity oriented schemes, they attract equity taxation. Returns earned from the ELSS schemes are not subject to tax if they are up to INR 1 lakh. However, if the returns exceed INR 1 lakh, the excess is taxed at 10%. So, if you earn returns up to INR 1 lakh, the entire earning would be a tax-free income in your hands. In case your returns are INR 1.5 lakhs, tax @10% would be payable on the excess return of INR 50,000 while INR 1 lakh would be completely tax-free.

Thus, ELSS mutual funds provide you with good tax benefits on both investments as well as on returns.

Top ELSS Funds in India

Here are some of the top ELSS funds in India to choose from –

Name of the fund3-year return as on 28th April 2020
Axis Long Term Equity Fund5.5%
Canara Robeco Equity Tax Saver Fund4.61%
Mirae Asset Tax Saver Fund3.91%
Invesco India Tax Plan3%
Aditya Birla Sun Life Tax Relief 96 Fund1.48%


Understand the concept of ELSS mutual funds, their suitability and tax implication before you invest in them. Choose the best ELSS funds available in the market based on their returns and consistency so that you can maximize your wealth.

Advantages of Money Market Funds and how tax is applied to it

The world of mutual funds is wide and varied. There is something for everyone. The risk-loving investor can opt for equity funds while debt funds fit the bill for the safe investors. Basis SEBI’s re-classification exercise, there are 16 types of debt funds. This classification is primarily basis factors such as the type of debt instrument each fund is permitted to invest in, the maturity period of the underlying instruments or their credit rating. In this article, we will give you an overview of money market funds and why you should consider investing in them.

What are Money Market Funds?

Money Market Mutual Funds providers invest in money market instruments with a maturity tenure of up to one year. For example, 

  • Treasury Bills (T-Bills), 
  • Commercial Paper, 
  • Certificate of Deposits (CDs), 
  • Re-purchase agreements, 
  • banker’s acceptances, etc. 

These instruments are generally highly liquid and ultra-safe. The core objective of Money Market Mutual Funds providers is to help investors with a safe and easily accessible investment avenue for short-term investments. These funds are as safe as putting money in a bank’s saving account, but with the potential of generating higher returns.

Advantages of money market fund investments

  • Liquidity

Money market funds are highly liquid in nature as they predominantly invest in fixed-income securities with a short maturity period. Investors have easy access to their principal investment. This factor makes these schemes suitable for unforeseen or emergency fund requirements. The high liquidity quotient of the market also allows the investors to capitalize on the increasing rate of return (short-term) and accordingly select an appropriate money market fund.

  • Safety

Money market instruments are known as a safe-zone for investors, especially when compared to equity investments. This is due to their high liquidity and the strong creditworthiness of the instrument issuers. Capital preservation is a key objective for Money Market Mutual Funds providers.

  • Returns

These mutual funds have the potential to generate healthy and stable returns, especially when compared to conventional investment avenues such as Bank Fixed Deposits of a comparable time frame. 

Money Market Mutual Funds providers design the funds in such a manner that the fund manager is able to able to adjust the investment duration basis the prevalent market conditions. For instance, when the market rates are on an upswing, these investments earn higher returns in the form of increased interest incomes. In the event of a downtime, they compensate for the reduced interest income through capital gain generation. This also helps to keep the overall risk of the investment under control.

  • Flexibility

These funds offer a great degree of flexibility to investors. They can be issued as well as withdrawn in short duration. 

Taxation of Money Market Mutual Funds

Money market funds are taxed as per the rules applicable to other types of debt funds. The taxation guidelines depend on the holding period of investment.

  • Holding period of fewer than three years

Gains from investment in these funds (when redeemed before completion of three years) are short-term capital gains. These gains are added to your overall taxable income and taxed as per the applicable income tax slab

  • Holding period of more than three years 

Gains from investments held for three years or more are long-term capital gains. The tax rate for such income is 20% with the benefit of indexation. The presence of indexation benefit helps to reduce the tax obligation. The initial cost of investment and the returns earned thereon get adjusted basis the inflationary rates.

The bottom line

Money market funds are the perfect type of debt funds for investors who are looking for a short-term cash-like investment which generates decent returns with minimal risk. These funds can also be a great diversification agent for the overall portfolio.

Best App to buy term insurance within a few clicks

The importance of a term insurance plan cannot be stressed enough. The plan covers the risk of premature death and provides your family financial security even in your absence. If you invest in a term insurance plan, you can leave behind a source of income for your family even when you, the breadwinner, are not around anymore. The plan has very low premiums and the coverage that it provides ensures peace of mind. That is why having a term insurance plan in your kitty is always recommended but after understanding the different types of term insurance plans.

Many of you know that you can buy life insurance policies online. But did you know that you can also buy term insurance online through your Smartphones?

The Internet has brought about a revolution in modern society and nowadays almost everyone owns a Smartphone. To make the Smartphone a solution for every need, many mobile applications are available which bring the whole world literally to your fingertips. There are mobile applications for buying term insurance plans as well and the best application among all is the ETMONEY application. Do you know why?

The ETMONEY app – an edge in buying term insurance online

The ETMONEY application has been designed by the Times of India Group which is also the creator of leading brands like Economic Times, Times of India, MagicBricks, Indiatimes, etc. As such, the application is promoted by a reputed brand name which gives it credibility and trust. The ETMONEY application gives you a one-stop platform for investments, loans and insurance. It is a multi-faceted personal finance application through which you can buy term insurance online.

Why buy term insurance online through ETMONEY?

There are various advantages which you can get when you choose to buy term insurance online through the ETMONEY mobile application. These advantages include the following –

  • Choice of the best brands

ETMONEY has tied-up with leading insurance companies of the segment to give you a choice of some of the best term insurance plans available in the market. You can find the range of term insurance plans offered by HDFC Life Insurance Company, ICICI Prudential Life Insurance Company, Max Life Insurance Company, etc. when you buy through the ETMONEY application. These companies offer some of the best term plans which ensure that you get the best coverage. You also get the choice of different types of term insurance plans and you can choose the plan which suits your needs.

  • Simple online process

Did you know that buying term insurance online took only a few minutes? The ETMONEY application has simplified the way that you buy term insurance online. You just have to enter in your personal details to find the most suitable term plans. You can then compare between the available plans and choose the plan which offers the most inclusive coverage at the lowest premium. Buying the plan is simple as you fill up an online application form and pay the premium online. Once the premium is credited, your policy is issued instantly and you get covered within minutes. 

  • Personalized assistance 

Insurance is a technical concept and you might have questions when buying the policy online. ETMONEY understands this and offers you personalised assistance when you buy the policy through its platform. You can connect with ETMONEY’s expert and get answers to all your queries. Moreover, even at the time of claim, you are promised help from ETMONEY’s team of experts so that you know how to get your claim settled at the earliest.

The ETMONEY app is available both on Google Play Store and Apple App Store. You can easily download the application on your Smartphone and buy term insurance online. The process is simple and you can also choose the best policy from the different types of term insurance plans available on the application. So what are you waiting for? Download the ETMONEY app today and insure yourself under a term insurance plan.

How and why are low duration funds essential for your portfolio?

2017 witnessed a major event in the Indian mutual funds space. SEBI launched a re-categorization and rationalization exercise to ensure that mutual funds remain “true” to their label and schemes within the same category share uniform characteristics. For investors, this re-classification of debt funds, equity funds and hybrid funds would translate into simplicity and standardization. This in turn would enable them to pick the correct funds for themselves. 

This re-classification exercise had three major type of changes – a mere change in the name of funds, funds which have now moved into another category (resulting in a change in investment style) and funds which have merged with some other fund. 

As per the revised classification of debt funds, there are 16 types of schemes in this category. Broadly, there are two ways to look at this classification of debt funds – basis their duration or strategy. Duration wise they can be classified into overnight, liquid, low duration, short duration, ultra-short duration, medium, medium to long and long duration. In this article, we will talk about low duration funds and why they are essential for your portfolio.

Low Duration Fund Meaning

Low duration funds invest in debt and money market securities in such a way that the fund’s Macaulay duration is between six months to a year. The maturity period of these funds lies somewhere in between the new classification of debt funds. They have a higher maturity duration than overnight, liquid and ultra-short duration funds but shorter than short, medium, medium to long and long duration funds.

As per a report published by BloombergQuint, the AUM of low duration funds grew by 8% in the year 2019.

Why it is a good idea to invest in low duration funds? 

  1. Risk

Debt funds are known as the relatively less risky investment route. However, within debt funds too, the level of risk varies basis the maturity period. Risk and maturity period are directly related. Longer is the maturity period, higher is the risk (due to higher probability of interest rate fluctuations).

As a result, low duration funds are considered as a safer option amongst debt funds. Investors with a lower risk tolerance can easily invest in these funds. 

  1. Return

Low duration funds score not only on the risk parameter, but also returns. Compared to other (relatively less risky) investment options such as savings account, etc. these funds have the potential to generate higher returns.

  1. Supplementary income

These funds can be used as a way to generate a steady stream of income (mix of interest and capital gains). A SWP (Systematic Withdrawal Plan) can help you to fund your financial goals in the 6 to 12 months’ time frame.

Things to keep in mind while investing in low duration funds

  1. Investment Tenure
    Low duration funds can give you the optimum results provided your investment tenure does not exceed one year. It is important to align your investment horizon with the maturity period of the chosen debt fund
  2. Expense Ratio
    Considering that your investment is for a relatively short time frame, the expense ratio can play a crucial role in your net gains. A lower expense ratio will help in maximizing your returns. However, this should not be the only selection criterion. It needs to be assessed along with other quantitative (performance track-record, consistency, etc.) and qualitative (fund house reputation, track record of fund manager, etc.) factors.
  3. Risk
    Always remember that no investment avenue (even FDs) are devoid of risk. A low-duration fund definitely carries lesser risk. However, the word to be noted is “lesser”. Even these investments have three risk components – credit risk, liquidity risk and interest rate risk. You should be mindful of this fact.
  4. Portfolio composition
    It can happen that these funds lend their corpus to risky borrowers in order to enhance their returns. Hence, you need to examine the quality of funds comprising the portfolio. A high amount of low-quality debt is a red flag as a large default will plummet the fund’s value sharply, leaving no or minimal scope for recovery.

Final Verdict

Low duration funds can be a great addition to your portfolio. Now that you know everything about low duration fund meaning, suitability and benefits, why are you wasting your idle cash in bank accounts?  Remember every penny counts!