A hybrid fund is an investment fund which is diversified among 2 or more asset classes. It is also known as Asset Allocation Fund.

Hybrid funds or the balanced schemes invest into a mix of equity and debt. Equity-oriented hybrid schemes invest at least 65 per cent of the corpus in equity. These schemes are less volatile than pure equity funds because of their mixed portfolio. The debt investments provide stability in times of volatility.

Hybrid Funds are a kind of mutual fund scheme where funds are invested in equities as well as debt. Generally, the ideal ratio is 65% in equities and 35% in debt

These funds are suitable for novices in the stock markets and very conservative equity investors.

Equity Savings Fund is a new variant of mutual fund wherein investments are made in equity, debt and arbitrage.

People are now looking for alternate investing avenues in place of fixed deposits. The investors looking to take lit bit more risk as compared to fixed deposits ae now investing in equity savings fund. Equity savings funds invest the total corpus in three parts: one-third in debt, one-third in arbitrage and one-third in pure equity.

Since one third investment is made in equity, it makes equity savings fund less risky. Return of around 8 to 9% is expected from the fund. Since this fund has equity, holding period is 1 year i.e if fund is held for 1 year then LTCG is exempted and if held for less than 1 year then STCG is taxed at 15%.

Why Hybrid Funds?

It is ideal for someone looking to invest with moderate risk where you get the benefits of equities as well as debt. Equities offer capital appreciation while debt securities offer regular income and have a lower risk when compared with equities. As they invest in various securities across sectors as well as different asset classes. It reduces the risk associated with individual securities.

Investment Objective

The first parameter that you should be looking is your investment objective i.e. what do you purpose from the investment like retirement, child’s education or anything else? This will help you in quantifying the amount of risk you can take. Another checkpoint should be the Investment horizon i.e. what is the time duration for which you plan to stay invested. There are two types of balanced Schemes- Equity oriented and Debt oriented. Equity Oriented Schemes have equities and debt in a ratio of 65:35. While debt oriented Schemes have debt and equities in a ratio of 65:35.

Taxation benefits

It is important to realize that capital gains from equity and debt oriented funds are treated differently for taxation. Equity oriented mutual funds are treated as equity funds for tax purposes, hence, call for tax-free returns if held for more than one year. The capital gain is taxed at 15% if the money is redeemed before 1 year. Debt oriented balanced funds are subject to a tax rate of 20% on long-term capital gains(arising post 3 years).

Fund History and Manager

Always check the track record of the fund manager before investing in any scheme because it is essential to know whom you are entrusting your money with. How long has he/she been managing the fund, how long has the fund itself been in operation and other questions pertaining to the credibility of the fund’s manager? It is possible that the mutual fund scheme has been generating higher returns but has recently witnessed a change in the fund manager, thereby, raising a question on the future performance.

Asset Allocation

The next round of elimination entails analysing the asset allocation by the fund. Asset allocation means the distribution of the funds across various class or sector as well as different type of companies like Large-Cap, Mid-Cap and Small-Cap. Large cap stocks are less volatile and less risky but offer low returns as compared to mid cap and small cap stocks. The debt component of the mutual fund should ideally comprise of risk-free government securities and highly rated corporate debt securities.

Quantitative Analysis

Last but not the least, there should be a quantitative analysis wherein we look at the Assets Under Management, Turnover Ratio, Expense Ratio, Alpha and the past returns (ideally last 1, 3 and 5 years). It is essential to compare the performance of a fund scheme vis-à-vis others in the same category rather than just looking at the numbers in silos.

Assets Under Management

AUM refers to the total market value of the assets that the mutual fund is managing on the behalf of its investors. A larger value of assets (at least greater than 100 crores) depicts the confidence level of investors in the fund. However, a huge AUM is a red flag

Turnover Ratio

Turnover Ratio typically depicts the change in portfolio holdings over time. Usually, funds with a lower ratio are preferred. However, if the reallocation prevents downside from likely underperformance in some sectors, it may be in good taste. It is therefore wise to analyse the sectors first.

Hybrid Funds is very Popular but are they Good?

Hybrid funds are mutual funds that invest in both stocks and bonds. These funds invest 50–75% in equity and rest in debt. Equity is mostly large cap companies whereas debt is mostly long-term debt. Typically, retirees or investors with low-risk tolerance invest in these funds for income and growth at the same time. Growth: Asset Under Management (AUM) for has grown by ~5x in less than 3 years. It’s incredible growth for this category. Balanced Advantage Funds: Recently, a new kind of balanced funds is launched and they are getting huge popularity. They are called balanced advantage funds. The only difference is that they use derivatives to manage allocation asset allocation across debt and equity. They also take more flexibility on asset allocation percentages. Again, it’s can be easily achieved by using arbitrage funds along with large cap equity and long- term debt fund.

Do I need to invest in Hybrid Funds?

No. There is no need to. Among the available investment options, mutual funds are but one choice. You can choose them if they are suitable for your need.

When should I invest in Hybrid Funds?

This is contextual. If you do not wish to invest directly in stocks (because you have better things to do or just don’t feel like it), you can choose equity mutual funds (defined below). If you would like to lower your tax outgo compared to a fixed or recurring deposit and if possible with better returns, you can choose debt mutual funds (defined below). The clearer you are about your need, the faster and confident you will be in taking decisions regarding mutual funds – well, this applies to anything in life!

How to invest in Hybrid Funds on Groww?

One of the best ways to hedge against the small-cap volatility is to adopt a phased approach, also known as Systematic Investment Plan (SIP) approach. We are sure that you must be aware of SIP and its benefits. Buying in small quantity but buying regularly provides you with faster growth. On Groww.in, all transactions to and from AMC is done via BSE. When you decide to invest in a large cap mutual fund of your choice, you choose that mutual fund on the website and click ‘invest’. Following that, you are redirected to the BSE page where you make the payment. BSE then directs your money to the AMC managing your mutual fund. To be assured at your end, you can visit the individual AMC website after the payment. You would be able to see all your purchased units against your folio number.