What are Hybrid Mutual Funds?

All you need to know about Hybrid Mutual funds.
Hybrid Mutual Funds
4 mins
17 January 2024

Hybrid mutual funds are a type of mutual fund that invest in a mix of different asset classes, such as equity, debt, gold, etc. The proportion of each asset class may vary depending on the fund’s objective, risk profile, and market conditions. Hybrid mutual funds aim to provide a balance of growth and stability to the investors by diversifying their portfolio across various assets.

How a hybrid mutual fund works

  • A hybrid mutual fund collects money from the investors and allocates it to different asset classes according to its investment strategy.
  • The fund manager monitors the performance of each asset class and adjusts the allocation as per the market conditions and the fund’s objective.
  • The fund generates returns from the capital appreciation and/or income distribution of the underlying assets.
  • The investors can redeem their units at the prevailing net asset value (NAV) of the fund.

Types of hybrid mutual funds

There are different types of hybrid mutual funds based on the proportion of equity and debt in their portfolio. Some of the common types are:

  • Aggressive hybrid fund: This type of fund invests predominantly in equity (65-80%) and the rest in debt. It is suitable for investors who have a high risk appetite and a long-term investment horizon. It aims to provide high growth potential with moderate stability.
  • Conservative hybrid fund: This type of fund invests predominantly in debt (75-90%) and the rest in equity. It is suitable for investors who have a low risk appetite and a short to medium-term investment horizon. It aims to provide regular income with low volatility.
  • Balanced hybrid fund: This type of fund invests equally in equity and debt (40-60% each). It is suitable for investors who have a moderate risk appetite and a medium to long-term investment horizon. It aims to provide a balance of growth and stability.
  • Hybrid equity fund: This type of fund invests mainly in equity (65-80%) and the rest in other asset classes, such as gold, real estate, etc. It is suitable for investors who have a high risk appetite and a long-term investment horizon. It aims to provide high growth potential with diversification benefits.
  • Hybrid debt fund: This type of fund invests mainly in debt (65-80%) and the rest in other asset classes, such as equity, gold, etc. It is suitable for investors who have a low risk appetite and a short to medium-term investment horizon. It aims to provide regular income with the benefits of diversified investments.

Factors to consider before investing in hybrid mutual funds

Before investing in hybrid mutual funds, investors should consider the following factors:

  • Risk-return trade-off: Hybrid mutual funds offer a trade-off between risk and return. The higher the equity exposure, the higher the potential return and the higher the risk. The lower the equity exposure, the lower the potential return and the lower the risk. Investors should choose a fund that matches their risk appetite and return expectation.
  • Fund performance: Investors should compare the performance of different hybrid funds over different time periods and market cycles. They should look at the fund’s consistency, volatility, and benchmark comparison. They should also check the fund’s expense ratio, exit load, and tax implications.
  • Fund objective: Investors should understand the fund’s objective and investment strategy. They should check the fund’s asset allocation, sector allocation, and portfolio composition. They should also check the fund’s investment style, whether it is value-oriented, growth-oriented, or blend-oriented.
  • Fund manager: Investors should evaluate the fund manager’s experience, expertise, and track record. They should check the fund manager’s investment philosophy, process, and approach. They should also check the fund manager’s tenure, team size, and turnover.

Ideal investors for hybrid mutual funds

Hybrid mutual funds are ideal for investors who want to diversify their portfolio across different asset classes and balance their risk and return. They are also suitable for investors who want to benefit from the changing market conditions and invest for a medium to long-term horizon.

However, not all hybrid funds are the same and investors should choose a fund that matches their specific needs and goals.

For instance:

  • Investors who want to save tax and have a high risk tolerance can opt for an aggressive hybrid fund that qualifies for equity-linked savings scheme (ELSS).
  • Investors who want to generate regular income and have a low risk tolerance can opt for a conservative hybrid fund that invests mainly in debt instruments.
  • Investors who want to have a balanced exposure to both equity and debt can opt for a balanced hybrid fund that invests equally in both asset classes.
  • Investors who want to diversify their portfolio beyond equity and debt can opt for a hybrid equity fund or a hybrid debt fund that invests in other asset classes, such as gold, real estate, etc.

Conclusion

Hybrid mutual funds are a versatile option for investors who want to diversify their portfolio and balance their risk and return. They offer different types of funds to suit different needs and goals. However, investors should do their own research and understand the fund’s objective, performance, and tax implications before investing.

Frequently asked questions

Is it safe to invest in hybrid funds?

Hybrid funds are not risk-free. They are subject to various risks, such as market risk, interest rate risk, credit risk, liquidity risk, etc. The level of risk depends on the fund’s asset allocation and portfolio composition. Generally, hybrid funds with higher equity exposure are more risky than hybrid funds with lower equity exposure. Investors should assess their risk tolerance and invest accordingly.

Which is better – hybrid fund or equity fund?

There is no definitive answer to this question. It depends on the investor’s risk profile, return expectation, and investment horizon. Equity funds are more suitable for investors who have a high risk appetite and a long-term investment horizon. They offer higher growth potential but also higher volatility. Hybrid funds are more suitable for investors who have a moderate to low risk appetite and a medium to long-term investment horizon. They offer a balance of growth and stability but also lower returns.

Are hybrid mutual funds tax free?

Hybrid mutual funds are not tax free. They are taxed according to their equity and debt exposure. Hybrid funds with more than 65% equity exposure are treated as equity funds for tax purposes. They are subject to long-term capital gains tax (LTCG) of 10% on gains exceeding Rs. 1 lakh in a financial year. They are also subject to short-term capital gains tax (STCG) of 15% on gains less than one year. Hybrid funds with less than 65% equity exposure are treated as debt funds for tax purposes. They are subject to LTCG of 20% with indexation benefit on gains exceeding three years. They are also subject to STCG as per the investor’s income tax slab on gains less than three years.

Is hybrid fund good for long-term investment?

Hybrid funds can be good for long-term investment, depending on the investor’s risk profile, return expectation, and investment horizon. Hybrid funds with higher equity exposure can offer higher growth potential over the long term, but also higher volatility. Hybrid funds with lower equity exposure can offer lower growth potential over the long term, but also lower volatility. Investors should choose a fund that matches their long-term goals and objectives.

What is the minimum investment in hybrid mutual funds?

The minimum investment in hybrid mutual funds varies from fund to fund. Generally, the minimum investment ranges from Rs. 500 to Rs. 5,000 for a lump sum investment and from Rs. 100 to Rs. 1,000 for a systematic investment plan (SIP). Investors should check the fund’s offer document and scheme information document for the exact minimum investment amount.

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