What is Hybrid Mutual Funds?
Hybrid mutual funds combine equity and debt asset classes under one scheme helping investors benefit from capital appreciation of equities and stability provided by fixed income instruments. Hybrid funds are ideal for beginners with medium to long-term investment horizon. They also reduce the risk associated with single-asset class investing and can potentially provide higher returns than debt funds.
How do Hybrid Mutual Funds work?
- The fund manager decides which asset classes should be included in the portfolio and how much should be allocated toward each class as per market conditions. This allows investors to benefit from the expertise of a fund manager and tailor their investments accordingly.
- The fund also typically re-balances the portfolio periodically to adjust for market conditions. By investing in hybrid mutual funds, investors can benefit from the advantages of both equity and debt instruments. Hybrid funds provide investors with a more balanced portfolio because the sources of risk and factors influencing returns for investment options within an asset class are similar.
Top 10 Performing Hybrid Mutual Funds
Types of Hybrid Mutual Funds
Aggressive Hybrid FundAggressive Hybrid Fund
Equity Savings FundMinimum 65% in equity, 10% in debt, and balance in Derivatives for hedging
Conservative Hybrid Fund10-25% in equity and 75-90% in debt
Dynamic Asset Allocation or Balanced Advantage FundDynamically shifts from 100% equity to 100% debt as per market conditions.
Multi-Asset Allocation FundMust investment in at least 3 asset classes (equity, debt, gold, or commodities) with minimum 10% in each
Balanced Hybrid Fund40-60% in equity and balance 40-60% in debt
Arbitrage FundTakes advantage of arbitrage opportunities with minimum 65% in equity.
Who should invest in Hybrid Mutual Funds?
Hybrid mutual funds provide investors with a diversified portfolio so that they can benefit from both equity and debt instruments.
- Investors seeking a balanced portfolio can benefit from the returns of equity and stability of debt instruments.
- Investors looking for moderate risk and return can look at investing in Hybrid mutual funds over pure equity funds. It’s an attractive option for investors with medium to high risk profile.
- Medium to long-term investment horizon reduces the risk of hybrid mutual funds and investors can benefit from the power of compounding.
- Suitable for New Investors or those who want to start investing but do not have much experience with stock markets as it reduces the complexity involved and allows investors to take advantage of the expertise of a fund manager.
- Retirees, especially those who retired early, can also benefit from a steady stream of income and the potential for capital appreciation over time with hybrid mutual funds without taking too much risk.
Taxation of Hybrid Mutual Funds
Hybrid mutual funds are subject to taxation depending on the type of securities and allocation of the fund.
|Type of hybrid funds||Long-term capital gains||Short-term capital gains|
|Equity-oriented hybrid funds (more than 60% allocation to equity)||Capital gains arising from investments held for more than one year are taxed at 10% (if gains exceed ₹1 lakh in a financial year) and are tax-free (if gains are less than ₹1 lakh in a financial year)||If units of hybrid mutual funds are sold within a year, then Short Term Capital Gains Tax of 15% will be applicable.|
|Debt-oriented Hybrid funds||Debt-oriented hybrid funds are taxed at 20% after indexation if held for more than 3 years.||Short Term Capital Gains are taxed as per applicable income tax slab if units are sold within 3 years.|
FAQs on Hybrid Mutual Funds
The risk involved in hybrid mutual funds is lower than pure equity funds and therefore hybrid funds are considered relatively safe investments.
Investing in hybrid or pure equity mutual funds will depend on the investor’s risk appetite and investment goals. Equity mutual funds provide higher returns over a longer-term period. However, they come with a higher level of risk. Hybrid Mutual Funds are more suitable for investors looking for moderate levels of risk and return.
Yes, Hybrid Mutual Funds are suitable for long-term investments. This is because over a longer term, the risk of Hybrid Funds balances out and investors benefit from the compounding effect as well as capital appreciation
Hybrid mutual funds are an attractive option for investors looking to diversify their portfolio and benefit from returns generated by both equity and debt instruments. They carry moderate level of risk and generate moderate returns, making them suitable for investors with medium term goals or those who have just started investing in the stock markets. Moreover, they offer tax benefits depending on the type of securities and instruments held by the fund.
There are two main types of Hybrid mutual funds: Equity-oriented Hybrid funds and Debt-oriented Hybrid funds. Equity-oriented Hybrid funds invest a majority of their corpus in equity instruments, while debt-oriented hybrid funds invest primarily in debt instruments. Amongst these main types, there are 7 different types of hybrid funds – Aggressive, Balanced, Multi Asset Allocation, Conservative, Equity Savings, Arbitrage, Dynamic Asset Allocation.
One of the long running hybrid mutual funds in India is the HDFC Balanced Fund. This fund invests in a mix of equity and debt instruments to generate returns for investors. The fund has an asset allocation of 65-75% in equities and 25-35% in debt securities, making it suitable for investors looking for moderate levels of risk and return.