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Hybrid Mutual Funds

Investments can be broadly classified into three types based on risk – equity (or high-risk) investments, debt (or low-risk) investments, and hybrid investments.

Most investment advisors ask investors to create an investment plan based on their financial goals, risk tolerance, and investment horizon.

Every individual has different needs and aspirations, and hence, it is difficult to classify an investor as a purely high-risk or low-risk-taker. This is where Hybrid Mutual Funds step in.

List of Hybrid Mutual Funds

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What are Hybrid Funds?

To simplify hybrid funds meaning - it can be said that hybrid funds are a combination of equity and debt investments that are designed to meet the investment objective of the scheme.

Each hybrid fund has a different combination of equity and debt targeted at different types of investors.

Features of a Hybrid Fund

The major characteristics of a hybrid fund are explained below:

a) It is a mixture

In its investing strategy, it has a wide portfolio that includes both equities and debt, as well as other assets. Through a single fund, you can invest in multiple asset classes.

b) It is always balanced

Hybrid funds have a well-balanced portfolio that allows them to take advantage of the best of all asset groups. It strives to provide larger returns with lower risks while also assisting you in meeting both your short-term and long-term financial objectives. Equity components contribute to long-term wealth generation, and debt securities protect against market swings.

c) The Investment Combinations Differ

Different types of hybrid funds have different equity-debt combinations. They are intended to fulfil the financial demands and investing objectives of various types of investors. It also caters to large-scale investors' risk tolerance, which ranges from conservative to moderate to aggressive. 

d) It is Known to Perform well in the long term

The hybrid fund investment is appropriate for investors who can commit to holding the units for at least three to five years.

Types of Hybrid Mutual Funds 

Since every hybrid fund can have a different asset allocation between equity and debt, they can be classified into the following types:

  • Equity-oriented Hybrid Funds

An equity-oriented hybrid fund invests at least 65% of its total assets in equity and equity-related instruments of companies across various market capitalizations and sectors. The remaining 35% is invested in debt securities and money market instruments.

  • Debt-oriented Hybrid Funds

A debt-oriented hybrid fund invests at least 60% of its total assets in fixed-income securities like bonds, debentures, government securities, etc. The remaining 40% is invested in equity. Some funds also invest a small part of their corpus in liquid schemes.

  • Balanced Funds

These funds invest a minimum of 65% of their total assets in equity and equity-related instruments and the rest in debt securities and cash. For taxation, they are considered to be equity funds and offer tax exemption on long-term capital gains of up to Rs. 1 lakh. The fixed income component makes it a good option for equity investors as it helps mitigate the volatility of equity investments.

  • Monthly Income Plans

Monthly Income Plans are hybrid funds that primarily invest in fixed-income securities and allocate a small portion of their corpus to equity and equity-related instruments.

This allows these plans to generate better returns than pure debt schemes and allows the fund to offer regular income to investors. Most plans also offer a growth option where the income grows in the fund's corpus.

  • Arbitrage Funds

Arbitrage funds buy stocks at a lower price in one market and sell them at a higher price in another. The fund manager constantly looks for arbitrage opportunities and maximizes the fund's returns.

However, there are times when good arbitrage opportunities are not available. During such times, the fund invests primarily in debt securities and cash. Arbitrage funds are considered to be as safe as debt funds. However, long-term capital gains are taxed like equity funds.

How Does a Hybrid Mutual Fund Work

A hybrid fund endeavours to create a balanced portfolio to offer regular income to its investors along with capital appreciation in the long term.

The fund manager creates a portfolio according to the investment objective of the scheme and allocates the funds in equity and debt instruments in varying proportions. Further, the fund manager also buys or sells assets if the market movements are favourable.

How Should You Invest in a Hybrid Mutual Fund?

Investments in mutual funds can be made directly through the AMC's or intermediary's (like Groww) website. To invest through Groww, you would need to sign up and complete the KYC procedure. On successful completion, you can begin investing in hybrid funds.

Why Should You Invest in a Hybrid Mutual Fund?

Some of the benefits offered by Hybrid Fund so you can start investing in them are: 

Hybrid funds are considered to be riskier than debt funds but safer than equity funds. They tend to offer better returns than debt funds and are preferred by many low-risk investors.

Further, new investors who are unsure about stepping into the equity markets tend to turn towards hybrid funds. This is because the debt component offers stability while they test the equity waters.

Hybrid funds allow investors to make the most out of equity investments while cushioning themselves against extreme volatility in the market.

Taxation Rules of Hybrid Mutual Funds

In hybrid funds, the tax on gains is as follows:

Equity Component of the Hybrid Fund

This is taxed like equity funds:

  • Long-Term Capital Gains - More than Rs. 1 lakh is taxed at 10% without indexation.
  • Short Term Capital Gains - they are all taxed at 15%.

Debt Component of the Hybrid Fund

This is taxed like any pure debt fund. The capital gains are added to your income and taxed as per the applicable income tax slab.

  • Long-term capital gains from the debt component are taxed at 20% after indexation and 10% without indexation benefits.

FAQs

Q1. What is a hybrid mutual fund?

Hybrid mutual funds are funds that typically invest in many asset classes. They are usually a mix of equity and debt assets, although they can also include gold or real estate.

Q2. How does a hybrid fund work?

These funds are a mixture of mutual funds. The fund manager chooses to invest in a variety of underlying assets to attain the investment objective. 

Q3. Who can invest in a hybrid fund?

These funds can be suitable for the:

  • Investors who wish to balance their risk and reward ratios.
  • Investors looking forward to generating regular income or growing wealth.
  • Investors with a low or moderate risk appetite.

Q4. What are the risks of investing in a hybrid fund?

The investment risk of hybrid funds is proportional to the asset allocation in their portfolio.

Q5. What are the main features of a hybrid fund?

The major characteristics of a hybrid mutual fund are that - 

  • It is a diversified investment.
  • It does not invest in one kind of asset.
  • It is suitable for the long term.

Disclaimer - Mutual Fund investments are subject to market risks; read all scheme-related documents carefully.

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