Everything You Need to Know About Hybrid Mutual Funds for NRIs

For NRIs looking to increase their wealth while managing risk exposure, investing in hybrid mutual funds is a good option. These investment tools in a single portfolio combine both equity and debt components. Being an NRI, you can access hybrid mutual funds that specifically cater to your investment preferences and needs. This makes it suitable for financial planning and wealth creation. 

Confused? Here, this blog answers your every question about the hybrid mutual funds. By the end of it, you will know whether these investments are right for you, how to invest, and how to increase your returns while complying with the taxes. So read on and gather all the information about it. 

What Are Hybrid Mutual Funds?

A hybrid mutual fund combines two or more mutual funds in one portfolio. Primarily, these funds combine equity and debt instruments. It provides the investors with a balanced investment approach, which, while maintaining the growth potential, easily handles market fluctuations. You can consider these funds as both a growth engine and a safety cushion. These are suitable choices for investors who are looking for moderate risk with reasonable investment returns. 

The foundation of hybrid mutual funds is based on three fundamental principles:

• Asset Allocation: Dividing your investment across different asset classes.
• Correlation: Between asset types using the different movement patterns.
• Diversification: Spreading the risk by not keeping all the amount in one investment.

Further, being an NRI, if you are seeking a way that combines growth potential with proper risk management, hybrid mutual funds provide a simple entry point into the Indian market. Actively managing your portfolio, the fund manager, based on the market conditions, constantly monitors your investment and adjusts allocations.

This was all about hybrid mutual funds. Moving ahead, let's discuss why these investment options are good for NRIs. 

Why Hybrid Funds Are Good for NRIs?

Many NRIs, while investing in India, face the same issue. Over the long-term period, pure equity funds offer 12-15% returns; however, they are volatile. Pure debt funds provide stability, but only offer 6-7% returns. In this situation, hybrid mutual funds resolve this issue. Investing in these products provides you with both growth potential with downside protection of debt. Further, for NRIs, it is more beneficial because:

• When you invest from overseas, you face the USD/INR currency rate fluctuation and market volatility. In this, these funds minimize the volatility of the total portfolio.
• If you reside in Dubai, then during the trading hours, you can watch the Indian markets. In this, the automatic rebalancing of the hybrid mutual funds comes with the ability to monitor daily.
• Additionally, in the hybrid mutual funds, goal-based planning works better. For instance, maybe in 10 years you will fund the education of your child, or in 5-7 years you want to purchase property in India. Compared to aggressive equity funds, hybrid mutual funds better match the medium-term goals of investors. 

So, these are the reasons why hybrid funds are good investment options for NRIs. Moving further, let's know the different types of hybrid funds available for NRIs. 

Types of Hybrid Funds for NRIs

The market consists of several types of hybrid mutual funds. To match the investment goals and risk tolerance of NRIs, each of them is designed with a different equity-debt allocation ratio. Having an understanding of them can help you choose the correct fund as per your financial situation.

Aggressive Hybrid Funds

These funds maintain a higher equity component, generally investing 65-80% in stocks and remaining in debt instruments. The aggressive hybrid through the debt portion by offering some stability aims to increase capital. Considering this, if your investment horizon is longer and you have a higher risk tolerance, these funds can match your growth objectives. 

Balanced Hybrid Funds

Balanced hybrid funds or balanced advantage funds generally maintain around 40-60%, an even distribution between debt and equity. Based on the market valuations, these funds rebalance the equity and debt automatically. It further assists in receiving reasonable investment returns with less exposure to market volatility.

Conservative Hybrid Funds

Over-investment growth, these funds give priority to preserving capital. Considering this, it allocated 10-25% to equity and 75-90% to debt instruments. The conservative hybrid funds are a perfect choice for investors seeking steady income with less volatility.

Multi-Asset Allocation Funds

Beyond just equity and debt, multi-asset allocation funds include commodities like gold investment options. It further offers wider protection against the changing market conditions. Additionally, these funds also provide portfolio diversification to investors. It is especially good for NRIs, who have limited investment options in Indian investments.

Equity Savings Funds

These funds combine debt, equity, and arbitrage options, generally managing a 30-35% direct equity exposure. In this, the arbitrage components assist in decreasing the overall portfolio risk, while potentially providing tax benefits. 

Arbitrage Funds

Arbitrage funds are low-risk funds. These funds influence the cost difference between cash and derivatives markets. Considering this, these funds behave like liquid funds but are taxed like equity funds. Most of the NRIs for short-term parking of funds use them as an alternative to tax-efficient investments. Further, these funds are good for short-term investments, i.e., 3-12 months, with better tax efficiency than debt funds. 

These were the different types of hybrid mutual funds available for NRIs for investment. Moving ahead, now let's know the tax implications for NRIs in these funds. 

Taxation for NRI in Hybrid Mutual Funds

In hybrid mutual funds, the tax on capital gains is as follows:

Equity Component of Hybrid Mutual Fund: This is taxed like equity funds.

• Short-Term Capital Gains: If the investments are held for less than 12 months, you pay short-term capital gains. You are liable to pay 20% tax on them.
• Long-Term Capital Gains: If you hold the investments for more than 12 months, you pay long-term capital gains. Considering this, if the capital gain is more than INR 1,25,000 in a financial year, then you are liable to pay 12.5% tax on it.

Debt Component of the Hybrid Fund: Regardless of the holding period, all gains on debts are taxed as per the income tax slab rate of the individual.

• For NRIs, according to the Income Tax Section 195, 30% TDS is deducted on the capital gains. 

Further, using the DTAA benefits you can claim a refund and avoid paying taxes twice on the same income. This is how NRIs pay taxation on the gains received from the hybrid mutual funds. Moving further, let's know how NRIs can invest in these funds. 

How NRIs Can Invest in Hybrid Mutual Funds?

Here is how NRIs can invest in hybrid mutual funds:

Step 1: Update Your Residential Status

If you moved overseas recently, update your Indian residential status to NRI status with your bank. Following this, your current savings account will be changed to an NRO account. Additionally, you need to open an NRE account separately.

Step 2: Complete KYC Compliance

Once your residential status changes to NRI, you need to complete a new KYC. Also, you need to submit the following documents:

• Identity proof (passport)
• Overseas address proof (residence visa, Emirates ID, utility bill)
• PAN card
• Work/ visa permit copy
• Overseas bank account statement

Step 3: Select Your Investment Platform

You can invest in hybrid mutual funds through:

• The wealth management portal of your bank
• Directly from the website of mutual fund companies
• Using online platforms like ET Money, Groww, or Zerodha Coin
• Taking assistance through a financial distributor or advisor

Step 4: Link Your Bank Account

Link your NRO or NRE account with your investment platform. To verify the account, the investment platform will send a small test deposit to you.

Step 5: Choose Your Hybrid Mutual Fund

Select funds based on:

• Performance track record of investment, i.e., 3-5 years
• Assets Under Management (AUM)
• Experience of a fund manager
• Expense ratio (lower is better, generally below 1%)
• Risk metrics

Step 6: Decide Lump Sum or SIP

• Lump Sum: Invest the complete amount at once. It is a good option if you have a large amount and the stock market has attractive options.
• Systematic Investment Plan (SIP): In this, you need to invest a fixed amount monthly. This averages out your purchasing cost and reduces the risk of timing. For rupee-cost averaging, many NRIs opt for SIP. 

Step 7: Set Up Payments

For SIP, from your Indian bank account, set up an auto-debit mandate. This certifies without manual intervention, timely investment. Additionally, for a lump sum, you can transfer funds via UPI, NEFT, or RTGS. 

Step 8: Track and Rebalance

In every 6-12 months review your investment portfolio. Also, check if your invested funds are meeting your expectations or not. Additionally, based on market conditions and changing financial goals, rebalance them. 

This is how, using the steps above, NRIs can invest in hybrid mutual funds. Moving ahead, now let's know the investment risks associated with these funds. 

Risk Associated with Hybrid Fund Investments

Among NRIs, hybrid mutual funds are popular for their balanced debt and equity. However, like every investment, they also carry certain investment risk. To know about them, read the points below.

Market Volatility Risk

A part of the hybrid funds is allocated to equities. This means, with the stock market, the value of the fund will change. Considering this, during market corrections, temporarily, your portfolio can lose its value even though these funds, through diversification, aim to reduce risk. 

Interest Rate Risk

The debt portion of the hybrid mutual funds, directly affected by the changes in interest rates set by the RBI. Additionally, the interest rate is also influenced by the inflation trends. Further, even though debt looks stable, during high-interest-rate cycles, your income returns may decrease. 

Asset Allocation and Rebalancing Risk

Hybrid funds heavily depend on the decision of the fund manager to shift between equity and debt. Additionally, wrong timing in reducing or increasing equity exposures can impact your returns. So, your returns from investment during market volatility depend on whether your fund manager rebalances it on time or not.

Credit Risk in Debt Instruments

With different credit quality, sometimes debt funds are invested in corporate bonds. If a company defaults or delays your repayment, the NAV may suddenly drop. Considering this, debt risk is not always free from market fluctuations. Additionally, poor credit exposure can decrease the stability you expect from the funds.

Currency Fluctuation Risk

Under this, NRIs investing with their foreign income should later convert it back to their home currency. It is because even if the funds are performing well, the currency movement can impact your final repatriated capital gains. Additionally, against your current resident country, if the value of the rupee decreases, you may get lower returns.

Taxation and TDS-Related Risks

Compared to residents, NRIs have different Indian taxation rules for hybrid funds, and in this, TDS adds another layer. Considering this, if the tax liability of an NRI is lower, they may face higher TDS. Additionally, without a tax residency certificate and Form 10F, they cannot claim DTAA benefits. Also, from equity-oriented funds, debt funds are taxed differently. Apart from this, poor tax planning and improper documentation lead to lower post-tax returns and tax leakage. 

So, these were the risks associated with hybrid mutual funds that NRIs should consider while investing. Moving further, now let's know when NRIs should consider investing in these funds. 

When Should NRIs Consider Investing in Hybrid Funds?

Hybrid funds are not always the best choice for investments for NRIs. Here is when you should choose them:

• You have an investment horizon of 3-7 years.
• You want equity exposure, but cannot handle pure equity volatility.
• You have medium-term goals such as education, property down payment, wedding, and more.
• You do not want to manage asset allocation actively.
• Looking for better income returns than FDs, but want to face lower risk than equity funds.

Further, in the above-mentioned conditions, NRIs should consider investing in hybrid mutual funds. 

Final Thoughts

Lastly, hybrid mutual funds provide NRIs with a practical investment path between conservative debt funds and aggressive equity funds. Additionally, if you are comfortable with mild risk and do not need guaranteed returns, these funds can be a good addition to your NRI portfolio. 

Further, if you are facing issues in choosing the right investment option in India, connect with Savetaxs. We have a team of financial advisors who can help you out in selecting the correct investment options as per your financial goals. Additionally, they can also help you with your tax planning in India.