When investing your hard-earned money in mutual funds, there are a plethora of options available. Several types of mutual funds allocate funds to various asset classes, but two that serve as the cornerstone of the majority of portfolios are Equity and Debt. These two are fundamentally opposite in nature; equity tends to be volatile over the short term but has the potential to generate significant returns over the long term. Whereas debt is more stable, its returns tend to be decent. Both asset classes have a role to play in a portfolio, depending on the individual investor’s risk appetite and investment horizon.

Now out of these different categories of mutual funds, one of them is Hybrid Funds which invest in both asset classes, i.e. equity and debt. In this article, let’s explore Hybrid Mutual Funds…

What are Hybrid Mutual Funds?

Hybrid Funds are a type of mutual fund that is typically a combination of equity and debt investments. In essence, a Hybrid Fund diversifies across a mix of bonds, equities, commodities, and other instruments by investing in two or more asset classes. These funds are ideal for investors who desire a carefully built portfolio with debt and equity exposure.

Simply put, these funds combine debt and equity, with roughly 65% of the portfolio being invested in stocks and the remaining portion in fixed-income instruments. The distribution of equity and debt inside a hybrid fund determines its risk-return characteristics. This fund will reduce the risk portion and help gain optimal returns over time. With Hybrid Funds, one may achieve a calculated blend of debt and equity that gives better returns and some degree of capital protection than a single debt or equity fund offers while avoiding the danger of concentration in the portfolio.

Types of Hybrid Mutual Funds

The market regulator SEBI has sub-categorised Hybrid Mutual Funds into 7 key types, depending on their exposure to equity and debt as follows:

Types of Hybrid Mutual Funds Asset Allocation
Equity-oriented Hybrid Funds
(also known as 'Aggressive Hybrid Funds')
These funds invest 65% to 80% of its total assets in equity instruments and the rest in the debt and money market.
Debt-oriented Hybrid Funds
(also known as 'Conservative Hybrid Funds')
These funds invest 75% to 90% of its total assets in debt instruments like bonds, debentures, and government securities and the rest in equities.
Balanced Hybrid Funds This fund balances the equity and debt portion of your investment and invests 40% to 60% investment in equity & equity-related instruments and 40% to 60% in Debt instruments.
Arbitrage Funds These funds are mandated to invest at least 65% of its total assets in equity instruments and the rest in debt instruments.
Equity Savings Fund Invests in equity, debt and arbitrage opportunities in the cash and derivatives segments of the equity market, with the equity and arbitrage portion constituting 65% of the portfolio. The unhedged equity portion of portfolio is conservatively managed and could be between 10% and 25%.
Dynamic Asset Allocation or Balanced Advantage Fund Investment in equity/debt is managed dynamically, 0% to 100% in equity & equity-related instruments; and0% to 100% in debt instruments. There is no restriction on minimum or maximum exposure to either equity or debt portion.
Multi-asset Allocation Fund This scheme invests in equity, debt, and even gold. It is mandated to invest in at least 3 asset classes with a minimum allocation of at least 10% in each asset class.

Hybrid Funds are a good option if you’re an investor searching for tactical exposure to both equity and debt. They give investors the best of both worlds: Steady income from debt securities and capital growth of equity assets.

How Are Hybrid Futual Funds Taxed?

Hybrid Funds contain both debt and equity components. So, the taxation of these funds will vary based on the details. Gains from the equity portion are taxed differently from the payments on the debt component.

Hybrid Mutual Funds Tax Implication
If a fund has over 65% allocation in equities
  • STCG @ 15%
  • LTCG above Rs 1 lakh is taxed at 10% without indexation
If a fund has below 35% allocation in equities
  • Both STCG and LTCG will be taxed as per the Income Tax slab rate
If a fund has equity allocation between 35% to 65%
  • STCG as per income tax slab rate
  • LTCG is taxed at 10% without indexation and 20% with indexation benefits.

(Source: Finance Bill 2023

[Read: Indexation Benefits on Debt Mutual Funds Removed: A Strategy to Manage Your Debt Allocation]

Why investors may consider investing in Hybrid Mutual Funds now?

In the current era of macroeconomic uncertainty, elevated volatility, high inflation, and geopolitical concerns, it is prudent to have a multi-asset approach to investing.

Since debt and equity have recently performed well, Hybrid Mutual Funds have expectedly attracted investor interest. In addition, the investment strategy of hybrid mutual funds is consistent with the existent investment theory most investors are familiar with, diversifying your investment to balance the risks and take advantage of market volatility.

[Read: Market at All-time High: How to Select the Best Mutual Funds for SIP Investment Now?]

Hybrid Funds assist investors in taking advantage of investing possibilities in the equity markets while providing the stability of debt markets, which could sustain the portfolio when equity markets correct in the interim. The importance of the right asset mix can be justified in scenarios where one asset class appears to be risky.

Who should invest in Hybrid Mutual Funds?

When selecting mutual fund schemes for your portfolio, as an investor, be aware of their unique investing mandates and objectives. Then, determine whether they are appropriate for your risk profile, the financial goals you are addressing, and the time horizon to reach them.

Hybrid Mutual Funds are investment funds that combine different asset classes, such as stocks and bonds, within a single portfolio. They are seen to be appropriate for both budding mutual fund investors and those with medium-term investment horizons. Investors may consider the various sub-categories of hybrid mutual funds based on their suitability. Hybrid Mutual Fund is a viable option for risk-averse investors, who are keen on growth from equity investments, but are wary of its downside risk.

In the current environment, where the markets appear to have already risen significantly, investors who prefer conservative growth, are getting close to a financial goal, and are more likely to panic during sharp market corrections would undoubtedly find the risk-reward outcomes of hybrid funds more acceptable than those of pure equity mutual funds.

Here’s a list of articles that may assist you in comprehending the nitty-gritty of Investing in Hybrid Mutual Funds:

Indian Equities Near a Lifetime High! Why Investing in Multi-Asset Funds Now Makes Sense

3 Best Balanced Advantage Funds or Dynamic Asset Allocation Funds to Invest in 2023

Best Multi-Asset Allocation Funds to Invest in 2023 – Top Performing Multi-Asset Allocation Funds in India

5 Best Aggressive Hybrid Funds to Invest in 2023

This article first appeared on PersonalFN here

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