What is a hybrid fund and what are its types, benefits, and uses?

Just as the world isn’t truly black and white, mutual funds aren’t only about equity and debt. The world has some shades of grey. Likewise, mutual funds have some hybrid options that combine equity and debt along with other options like gold, real estate, etc. These hybrid mutual funds are as unique as they sound and can offer you the best of all worlds.

Wondering what is a hybrid mutual fund? Read on!

What is a hybrid fund?

To answer your question of what is hybrid fund, hybrid fund meaning a balanced fund, is an investment vehicle that combines elements of both equity and debt securities within a single portfolio. By blending these asset classes, hybrid fund meaning balanced fund aims to achieve a balance between growth and income while managing risk. So, while answering the question of what is hybrid fund, you should know that the equity portion offers potential for capital appreciation, while the debt component provides stability and income generation. Hybrid funds come in various types, such as aggressive, conservative, and balanced, catering to different risk profiles. These funds provide investors with a diversified approach to achieve a mix of returns, suitable for varying investment objectives. Now that you know what is hybrid mutual funds, let us take a look at the various types.

Types of hybrid funds

If you want to add hybrid funds to your portfolio, here are the options you have, thanks to SEBI.

1. Conservative hybrid fund: These funds invest approximately 75% to 90% of their assets in debt instruments. The rest is invested in equities and equity-related securities.
2. Balanced hybrid fund:As the name suggests, a balanced hybrid fundinvests in debt and equity in a balanced manner. The minimum and maximum investment in equity or debt are 40% and 60% respectively. This allocation can bend on either side depending on market conditions.
3. Aggressive hybrid fund:Aggressive hybrid funds invest 65% to 80% in equities and equity-related securities and 20% to 35% in debt securities. 
4. Dynamic asset allocation or balanced advantage fund:Such hybrid funds have the liberty to invest 0 to 100% in equity or debt instruments based on market conditions.
5. Multi asset allocation fund:These funds invest a minimum of 10% in at least three different asset classes, namely equity, debt and gold.
6. Arbitrage fund:These funds invest in stocks by purchasing them at a lower price and selling them at a higher price in another market to make a profit. They invest a minimum of 65% in equities and equity-related instruments.
7. Equity savings fund:Such funds balance risks by investing in equities, arbitrage and debt. The minimum asset allocation in equity and debt is 65% and 10% respectively.

How do hybrid mutual funds work?

Hybrid funds follow a unique mutual fund investing style. Their fund managers can invest in equity and debt in varying percentages based on the fund’s objective as well as market conditions. The primary goal of such funds is to offer you a blend of capital appreciation and capital protection. So, you can expect a moderate risk level.

Benefits of hybrid mutual funds

1. Diversification:You can get exposure to different asset classes with a single fund. Moreover, you can get diversification within an asset class too.
2. Suitable for beginners:If you are starting out and want to tap into the potential of equity without taking a lot of risks, you can balance it out with hybrid funds.
3. Suitable for different risk profiles:Different hybrid funds have different levels of allocation to equity, debt and other assets. Thus, you can choose a fund as per your risk appetite.
4. Auto rebalancing:Hybrid mutual funds are managed by professional fund managers who shift the assets from equity to debt and vice versa according to the market movements. As an investor, you do not have to time the market and can sit back and relax.

Taxation of hybrid mutual funds

The taxation of hybrid funds depends on their type. Equity-oriented hybrid funds are taxed like equity mutual funds. On the other hand, debt-oriented hybrid funds are taxed like debt mutual funds.

If a hybrid fund invests at least 65% of the assets in equities and equity-related securities, it is considered to be an equity-oriented hybrid fund. If it invests at least 60% of the assets in debt securities, it is considered to be a debt-oriented hybrid fund.

Click here to understand the taxation of equity funds and debt funds

Should you invest in hybrid funds?

In the discussion of equity vs debt funds, hybrid mutual funds can offer a middle ground. You can invest in hybrid funds if you want to balance investment risks and returns and prefer relatively low-risk funds to pure equity. Additionally, these funds are also suitable for medium-term goals. 

Conclusion

Having cleared your many doubts on what is hybrid fund and its varied aspects, we can conclude that in the diverse landscape of investment options, hybrid funds stand out as versatile solutions that strive to strike a harmonious balance between growth and stability. By seamlessly integrating the potential of equities with the reliability of debt instruments, these funds cater to a wide spectrum of risk appetites and financial goals. Whether you're an investor seeking growth while managing risk, a conservative individual seeking income, or someone in between, hybrid funds offer a tailored approach. 

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