Everything you need to know about hybrid funds

Nimesh Shah
Sunday, 25 August 2019

Hybrid mutual fund schemes diversify the investment and attempt to get the best of both worlds - capital appreciation through equity investing as well as stability and returns through investments in debt instruments.

What are hybrid mutual funds?
Hybrid funds are funds made by combining two different categories of assets classes, typically equity and debt. Given the exposure to two different asset categories, an investor by opting for a hybrid fund can avail the benefit of both the asset classes.

Understanding the concept
By investing in equity-oriented mutual funds, one primarily invests into equity shares of companies with an aim to generate capital appreciation. Thus, equity funds hold the potential to generate higher returns, but also tend to carry higher risk. In contrast, debt mutual funds primarily invest in debt securities, money market instruments, treasury bills, corporate bonds, etc. to generate returns. These are widely considered to be less risky investment avenues and hence, the earning potential over long periods of time could be less as compared to equities. This is where hybrid funds come into play.

Hybrid mutual fund schemes diversify the investment and attempt to get the best of both worlds - capital appreciation through equity investing as well as stability and returns through investments in debt instruments. Hybrid schemes through the use of asset allocation and portfolio diversification strive to ensure maximum returns at minimal risk.
A hybrid mutual fund scheme that invests over 65 per cent of its corpus in equities and the remaining in debt is called an equity-oriented hybrid mutual fund. Conversely, a hybrid mutual fund scheme that invests over 65 per cent of its corpus in debt instruments and the remaining into equity is called a debt-oriented hybrid mutual fund.

Types of hybrid mutual funds

There are different types of hybrid mutual fund schemes based on asset allocation. On the basis of the equity-debt mix, there are conservative hybrid funds (10-25 per cent in equities, rest in debt), balanced hybrid funds (40-60 per cent in equities) and aggressive hybrid funds (65-80 per cent in equities).

Who should invest in hybrid mutual funds?

Hybrid schemes have a lot to offer for beginners and well as seasoned investors. They are designed and subcategorised in order to 
cater to the widest range of potential investors.

New investors, especially those who are new to the world of mutual funds can consider these types of funds as the stepping stone to mutual fund investment experience. After evaluating their risk profile and investor profile by looking through and studying hybrid mutual fund schemes, as these schemes have exposure to multiple asset classes. Also, investors can improve their understanding of mutual fund investments during and through their hybrid scheme investment experience.

Even seasoned investors can benefit greatly from the right hybrid fund scheme. Given that the asset allocation mix changes as per the attractiveness of the asset classes under consideration, one can opt for lump sum investment and be rest assured that one won’t be exposing investments to undue risk.

If the objective of the investment is towards a long-term goal, aggressive hybrid funds may be the option to go for, given their higher equity exposure. The minimum 65 per cent equity exposure also ensures that the investment gets equity treatment for taxation purpose.

Meanwhile, conservative and balanced hybrid funds are likely to be suitable for risk-averse investors looking for a small allocation to equity to provide the much-needed growth element to one’s long 
term investments.

 As a result, this category of fund turns out to be an ideal one for first-time equity investors or for any investor who is looking for inflation-beating returns. However, one must remember that both these categories of hybrid funds attract debt taxation.

To conclude, an investor with hybrid funds gets the benefit of active risk management, portfolio diversification and asset allocation by being invested in a hybrid mutual fund scheme.

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