Understanding different types of hybrid funds

Hybrid things often attract attention —be it hybrid cars, plants, or animals. What makes hybrids unique is their ability to combine features of two different things. They create something unique and valuable. This concept is also the essence of hybrid mutual fund schemes. Hybrid funds blend the characteristics of debt and equity funds to balance and manage risk effectively. But did you know there isn't just one type of hybrid fund? There are several, each with its own unique features. Let's explore the different types of hybrid funds and what sets them apart.

What are the different types of hybrid funds?

The Securities and Exchange Board of India (SEBI) has categorised hybrid mutual funds into the following seven categories:

1. Conservative hybrid funds

These mutual funds invest 10% to 25% in equity and equity-related instruments and the rest, 75% to 90%, in debt instruments. Similar to their name, these mutual fund schemes maintain a conservative portfolio that prioritises investing in debt funds. By doing so, they aim for stability with just a touch of growth.

2. Balanced hybrid funds  

Balanced hybrid funds aim to strike the perfect balance between debt and equity. These funds invest 40% to 60% in stocks and the remaining 40% to 60% in debt instruments. This asset allocation strategy allows them to offer moderate growth with moderate risk.

3. Aggressive hybrid funds

Aggressive hybrid funds invest 65% to 80% in equity and equity-related instruments. This helps these funds maintain an aggressive portfolio that is focused on growth. The rest 20% to 35% of funds are invested in debt instruments for stability.

4. Dynamic asset allocation or balanced advantage funds 

This hybrid fund follows a relatively flexible approach. There is no strict rule or percentage for asset allocation. The fund simply adapts to the market conditions. The fund manager can maintain a portfolio ranging from 0% to 100% in both equity and debt. The focus of the fund is to fetch potential returns by altering its investment strategy depending on how the market functions.

5. Multi-asset allocation funds 

Just like the name suggests, multi-asset allocation funds invest in multiple asset classes. These funds invest in at least three asset classes with a minimum allocation of 10% each. They are known for their diversification benefits as they spread the risk across asset classes.

6. Arbitrage funds 

Arbitrage funds invest at least 65% in stocks. What sets them apart from other funds is their arbitrage techniques. These funds generate profits by simultaneously buying and selling securities in two different markets. This strategy helps these funds to capitalise on the price differences between markets with the aim of providing stable returns.

7. Equity savings funds

These hybrid funds combine equity, debt, and derivatives to offer a mix of growth and safety. They are required to maintain a minimum investment of 65% in stocks and 10% in debt instruments.

To sum it up

Hybrid mutual funds can offer you a blend of multiple asset classes to balance out risk and growth potential. However, with so many types of hybrid funds, it can be confusing to choose one. This is why it is essential to understand their differences and characteristics before investing.

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