Passive hybrid funds combine the long-term growth potential of equities with the relative stability of government securities (Gsecs). According to Bhavesh Jain, president and co-head of factor investing at Edelweiss Mutual Fund, "equities act as the primary return driver while Gsecs help cushion market volatility." The debt allocation can make the investment journey less volatile than that of a pure-equity portfolio, providing a smoother investment experience and improved risk-adjusted outcomes. As reported by Business Standard, these funds follow a rule-based approach with automatic rebalancing that creates discipline in asset allocation. The allocation to Gsecs can control the risk arising from the credit quality of instruments in the debt portfolio, offering a smoother investment experience and improved risk-adjusted outcomes.
The funds offer significant tax advantages through internal rebalancing that doesn't create tax liability for investors. According to Deepesh Raghaw, SEBI-registered investment adviser, "internal rebalancing does not create a tax liability for the investor. This makes a combined product more tax-efficient than maintaining the same equity-debt allocation independently." However, investors must understand the scheme's tax classification, as hybrid funds with equity exposure below 65% would be subject to non-equity taxation, which would reduce post-tax returns. As reported by Business Standard, these funds also offer a low-cost approach to hybrid investing with disciplined asset allocation following defined rebalancing approaches.
First-time equity investors and conservative investors may find passive hybrid funds suitable, as they can offer a less volatile experience than pure-equity funds. According to Vishal Dhawan, founder and CEO of Plan Ahead Wealth Advisors, "investors seeking a hassle-free, tax-efficient asset-allocation solution may consider these funds." These funds may also suit investors who want the prescribed asset allocation and do not intend to make frequent tactical changes. Existing equity investors seeking to reduce portfolio volatility may also consider them. However, aggressive investors may find the equity allocation restrictive, and those preferring active asset allocation or tactical shifts between asset classes may find the structure limiting. As reported by Business Standard, investors working with advisers may prefer separate funds for easier portfolio-level asset allocation control.
Investors must understand the underlying equity and debt indices before investing in passive hybrid funds. According to Raghaw, "those who find the structure too complex should avoid these funds." Large-cap stocks can provide stable returns with lower upside potential, while mid-caps may offer higher long-term returns but come with greater volatility. Gsecs may offset equity drawdowns and do not carry credit risk, but have long duration and can fall considerably when interest rates rise. Investors can select index combinations that suit their risk profile and investment objectives, with the debt allocation reducing equity market rally participation. As reported by Business Standard, investors can choose the equity and debt indices that provide exposure to particular market-cap segments and investment strategies that suit their investment objectives.
