What are Hybrid Mutual Funds
Equity mutual funds provide good long-term returns but have higher risks. On the other hand, debt mutual funds are less risky but offer lower returns. So, is there any option that combines both these categories and provides a balance between both of them?
Let’s answer this question in greater detail in this blog.
What are hybrid mutual funds?
Hybrid funds can be considered as a mixture of both equity and debt funds. They invest in a combination of asset classes. They invest some proportion of funds in equity as well as debt.
Many investors prefer hybrid funds as they have a better chance of generating higher returns compared to debt funds while having lower risk than equity funds. They combine the growth of the equity fund and the safety of the debt fund. The return profile is generally better than that of the debt funds.
Equity-oriented hybrid funds (Aggressive Hybrid Funds) are ideal for investors seeking growth while maintaining stability. Conservative investors seeking a boost in returns with a small exposure to equity can benefit from debt-oriented hybrid funds (Conservative Hybrid Fund).
Types of hybrid mutual funds
As per the SEBI guidelines, hybrid funds can be divided into 7 types:
- Conservative Hybrid Fund
- Balanced Hybrid Fund
- Equity Savings
- Aggressive Hybrid Fund
- Arbitrage Fund
- Dynamic Asset Allocation or Balanced Advantage Fund
- Multi Asset Allocation Fund
You can understand each of these categories in detail here.
Who should invest in hybrid funds?
Hybrid funds bring the best of both worlds. They generate higher returns than debt funds while being a safer option compared to equity funds. They also turn out to be a great option for new investors. Moderately risk-averse investors should look into investing in hybrid funds.
A note on arbitrage funds
Arbitrage funds are different from other hybrid funds. Arbitrage funds generate returns by simultaneously buying and selling securities in different market segments. While other hybrid funds can be used for medium to long-term financial goals, arbitrage funds are generally used to park excess cash in the portfolio.
These funds provide a unique opportunity to invest in the equity market for a short term with virtually zero risk. As arbitrage opportunities are not common in the market and risk is ideally zero, these funds generate returns similar to FDs.
Taxation on hybrid funds
Hybrid funds consist of both equity and debt instruments.
As per the SEBI guidelines, if the equity portion of the fund is greater than 65%, then it is taxed as an equity-oriented fund. You can find complete taxation details of equity-oriented mutual funds here.
If the equity portion of the fund is less than 65%, then the funds are considered “other than equity-oriented funds”.
One important thing to note here is that indexation benefits are revoked for pure debt funds. You can still take advantage of indexation benefits in the case of hybrid mutual funds.
FAQs
What are hybrid mutual funds?
A hybrid mutual fund invests in both equity and debt instruments, aiming to offer investors a balanced portfolio. Some hybrid funds also invest in commodities.
How do I choose the right hybrid mutual fund?
An investor's investment objectives, risk tolerance, and investment horizon should all be taken into consideration when choosing a hybrid mutual fund. Additionally, the expense ratio, asset allocation strategy, and past performance of the fund should be evaluated. You should invest in a fund with a consistent track record.