Hybrid funds have been making the rounds recently. As the name suggests these funds are a mix of both equity and debt investments. Several funds such as the LIC MF Equity Hybrid Fund, Canara Robeco Equity Hybrid Fund, and Aditya Birla Sun Life Equity Hybrid ’95 Fund, and others have been in the market for 25 years and offered returns of 8-18% since inception.
These funds are a good option to invest in if you are a new investor. However, before you decide let us understand more about these funds.
What Are Hybrid Funds?
The hybrid fund, also known as an asset allocation fund, invests in a combination of one or more asset classes based on the scheme’s investment goals. These funds invest in different asset classes to diversify the portfolio and reduce the risks involved. In the short term, the goal is a regular income; in the long run, it is capital appreciation.
You must first develop an investment strategy based on your financial objectives, risk appetite, and investment time frame before you begin investing in the market. Not every investor is an expert in asset allocation; this is where a hybrid mutual fund can help an investor understand the stock market better.
Who Invests in Hybrid Funds?
A capital market investor can broadly be categorized as either risk-takers or aggressive investors and risk-averse or conservative investors based on risk tolerance. Apart from these two groups, there is a third group of investors who have moderate risk tolerance.
On the other hand, Conservative investors invest their money in less volatile instruments such as debt, government securities, and money market instruments. As a result, such investors have a low-risk appetite and target returns higher than fixed deposits.
The third type of investor has a flexible investment strategy and seeks moderately high returns from low-risk, less volatile instruments. This investor group is gaining traction in hybrid funds, which provide a nice mix of debt and equity based on risk tolerance.
In this article, we will answer everything about hybrid funds, along with their merits and demerits. So, let us get started.
How do Hybrid Mutual Funds Work?
In the broad sense, the Hybrid Fund’s risk composition is-
● 65-80% in equity and equity-related instruments
● 20-35% in Debt and Money Market instruments
● 0-10% in REITs/ InvITs
Hybrid mutual funds operate by rebalancing their portfolios of equity and high-quality debt instruments in response to market conditions. The Fund Manager buys/sells assets based on market favorability.
| Type of Hybrid Fund | Asset allocation strategy | Risk-Appetite |
| Equity Savings Fund | Equity & Equity related incl derivatives – Min 65% Debt Securities incl Money Market instruments- Min 10% | Moderate Risk |
| Multi-Asset Funds | Min 10% in 3 Asset Classes(Equity, Gold, Debt, Real Estate etc) | Moderate Risk |
| Arbitrage Funds | Equity- Min 65% Debt- Rest amount | Low Risk |
| Dynamic Asset Allocation Funds/ Balanced Advantage Funds | Follows Dynamic Fund Allocation depending on market volatility. When Equity Market Valuations are low- increase equity and reduce debt allocation and vice versa. | Low Risk (For min investment Horizon of 5 years) |
| Aggressive Hybrid Funds | Equity & Equity related securities- 65 – 80 % Debt & Money Market instruments- 20 – 35% | Moderately High |
| Conservative Hybrid Funds | Equity & Equity related assets- 10- 25% Debt & Money Market Instruments- 75- 90% | Moderately Low |
Benefits of Hybrid Funds
- Provide auto-balancing of assets to align with the targeted asset allocation.
- Relatively less volatile than pure equity investments as the portfolio is well-diversified across multiple asset types.
- Lower tax burdens when invested in an equity-oriented hybrid fund for the long term. Avail indexation benefits on long-term investments in the debt-oriented hybrid fund.
- Helps in goal-based investing to achieve short-term to long-term investment needs.
Disadvantages of Hybrid Funds
- Equity exposure brings in market volatility and therefore carries market risk.
- Your corpus may be subject to credit risk if low credit-rating debt instruments are chosen. Enhances the probability of default.
- Bond value is inversely related to interest rates. Any interest rate fluctuations may sabotage your fund value.
- You have to rely on the judgment of the fund manager when investing in Hybrid mutual funds. You do not have any direct/indirect control over the asset allocation.
How to Invest in Hybrid Funds?
You can choose any of the modes of investment subject to your suitability-
● Offline Mode- Visit the nearest office of the fund house you wish to invest with. Fill in the application form and submit related formalities to get started.
● Online Mode- You can directly invest through the website of the fund house or your Demat account as well. Direct investments have a lower expense ratio and save you money on intermediary fees.
What are the tax implications of investing in a Hybrid Fund?
Hybrid Funds with 65% or more stake in the equity component are taxed as equity funds. Those with less than 65 % equity are taxed as Debt Funds.
Equity Hybrid Funds
| Long-Term Capital Gain ( Tenure >= 12 months) | Up to 1 Lac- Tax-Free Above 1 Lac- 10% |
| Short Term Capital Gain (Tenure < 12 months) | 15% |
Debt Hybrid Funds
| Long-Term Capital Gain (Tenure >= 36 Months) | 20% with indexation benefit |
| Short-Term Capital Gain (Tenure < 36 months) | As per the investor’s tax slab |
Key Takeaways
Hybrid Funds are the best option for first-time investors because it allows them to walk safely through market volatility while securing decent returns. To derive the best performance of Hybrid funds in India, adopt a balanced investment strategy with a focus on profit growth and valuations.
FAQs
What are the entry and exit loads in a hybrid mutual fund?
Entry and exit loads are calculated as a percentage of NAV at the time of scheme entry or exit. Mutual funds currently have no entry load. Although an exit load is deducted from the redeemable amount payable to the investor.
How can I find out where my money has been invested in the Hybrid fund scheme?
Complete details about the scheme portfolio are available in the monthly fact sheet and on the AMCs website. The information includes the amount invested in each asset (equity, equity-related instruments, debentures, government securities, and so on), as well as the market value and percentage weightage to NAV.
Who Should Invest in Hybrid Funds?
It is pertinent to assess your risk profile, financial goals, and time horizon before testing the equity waters. Hybrid funds are ideal for investors who prefer low-risk and moderate gains over traditional instruments such as fixed deposits. It enables investors to reap the most of their equity investments while protecting them from market volatility.
Read more: How Long-term investing helps create life-changing wealth – TOI.
I’m Archana R. Chettiar, an experienced content creator with
an affinity for writing on personal finance and other financial content. I
love to write on equity investing, retirement, managing money, and more.