You must have heard and read a lot about Mutual Funds, but there are also various types of funds within Mutual Funds, such as Equity Funds, Debt Funds, Hybrid Funds, etc. Each of these funds includes different levels of risk and returns. Those who invest in Mutual Funds are often individuals who do not want to take risks in the stock market.
Mutual Fund in India: Every fund included in a Mutual Fund has different returns and risks along with it. For higher returns and higher risk, there are Equity Funds, and for higher returns with Fixed Deposits (FD) and lower risk, there are Debt Funds. Hybrid Funds have been created for balanced returns with a balanced level of risk.
But do you know what a hybrid fund is? So today, we will talk about Hybrid Funds in this article and find out how much risk and return is there in a hybrid fund. Please read this article to the end so that you can get all the information about hybrid mutual funds and make your investment even better.
What is Hybrid Fund ?
Hybrid funds are types of funds in which a combination of equity and debt funds is invested, meaning funds that invest in both equity and debt assets. Hybrid funds, also known as balanced mutual funds, allocate investments in a certain proportion between equity shares of companies and debt schemes. This allocation includes both high-risk and low-risk components, creating a balanced portfolio. Therefore, such mutual funds are commonly referred to as hybrid or balanced mutual funds.
Hybrid funds can be a better option for those who are not willing to take higher risks. Different mutual fund companies offer various hybrid funds, and below, we will learn about some of them, which can assist you in making the right investment decisions.
Types of Hybrid Funds
According to the regulations of the Securities And Exchange Board Of India (SEBI), hybrid funds have been divided into 7 categories or types, each with a different allocation strategy for investment. The 7 types of hybrid funds are given below:-
What is Aggressive Hybrid Fund
Aggressive hybrid funds are hybrid mutual funds in which 65%-80% of the portfolio is invested in equity shares and securities related to equity. The remaining 20%-35% of the funds can be invested in debt instruments.
What is Conservative Hybrid Fund
Conservative mutual funds are hybrid funds in which 75% to 90% of the portfolio is invested in debt instruments. This means that the majority of the fund’s money is typically allocated to debt schemes, while the remaining investment is made in equities and related securities.
What is a Balanced Hybrid Fund
The name itself indicates that in Balanced Hybrid Funds, the manager invests in both equity and debt in a balanced manner. In this fund, depending on the market conditions, 40% may be invested in one and 60% in the other. One fund company may have invested more in equity, while another has invested more in debt, based on the market situation.
What is Dynamic Asset Allocation or Balanced Advantage Fund
Dynamic asset allocation funds have the flexibility to invest anywhere between 0% to 100% in equity or debt instruments based on market conditions.
What is a Multi-Asset Allocation Fund
Multi-asset funds are referred to as hybrid mutual funds that are required to invest a minimum of 10% of their total portfolio in equity, debt, gold, real estate, etc.
What is an Arbitrage Fund
Arbitrage hybrid funds earn profits by buying stocks at a lower price and selling them at a higher price in other markets. These funds invest a minimum of 65% in equity and related instruments.
What is Equity Savings Fund
This fund balances risk through investments in equity, arbitrage, and debt. The proportion of investment in equity and debt is 65% and 10% respectively.
Read also: What is Equity Mutual Fund? – Complete information about it
Benefits of Hybrid Mutual Funds
Investing in hybrid funds has many benefits, which are as follows:
- Diversification: In a hybrid fund, you can invest in various asset classes, and in addition to all these, you can get the benefits of diversification.
- Suitable for different risk profiles: Various hybrid funds allocate differently among equity, debt, and other assets, catering to diverse risk profiles. Investors can choose a fund based on their risk-taking capacity.
- Suitable for new investors: If you are new to investing and want to take advantage of potential opportunities without exposing yourself to high risks, you can consider balancing it with a hybrid fund, without equity.
- Rebalancing: Hybrid funds are managed by professional managers who, based on the ups and downs in the market, shift assets between debt and equity to maintain the desired balance.
Disadvantages of Hybrid Funds
We have understood the benefits of investing in hybrid funds, but do you know that there could be some drawbacks associated with investing in hybrid schemes of mutual funds, which are as follows:-
- Market Risk: In hybrid mutual funds, equity or sometimes debt funds can also be vulnerable to market fluctuations, which may result in potential losses for investors.
- Interest Rate: The impact of interest rate fluctuations on a debt fund portfolio can affect your profits, this can cause a reduction in your profit.
- Credit Default Risk: Sometimes, fund managers take the crucial credit risk, which increases the portfolio being affected by credit default risk.
Hybrid Fund Charges
When we invest in a hybrid mutual fund, we have to pay some fees as well. There are mainly two types of fees associated with investing in hybrid funds, which are as follows:-
Expense Ratio – When we invest in Hybrid Funds, we don’t manage the fund ourselves; instead, it is managed by an experienced fund manager. The fee charged to the fund manager is known as the expense ratio.
Generally, this expense ratio can range from 0 to 2%. This fee is charged annually on the invested amount.
Exid Load – The term “Exit Load” is applied when you redeem your fund before a specified period (within the holding period). An exit load of up to 1% is charged on the invested amount, reducing the returns you receive.
Read also: Best SIP Plan For 1000 per Month
Taxes on Hybrid Funds
When we invest in hybrid funds, we primarily have to pay three types of taxes, which are as follows:-
- The Long-Term Capital Gains (LTCG) tax rate varies for equity and debt funds. For equity, it is 10%, and for debt funds, it is 20%.
- Short-Term Capital Gains Tax, STCG also applies separately to both equity and debt funds. It is 15% for equity.
- Dividend Income – If you choose a hybrid dividend scheme, you are required to pay tax on the dividends. This tax is levied on your profit amount after adding it to your total income. – What are the Short-term Mutual Fund
Top 10 Best Hybrid Mutual Funds
| Fund Name | Types of Fund | Annual Return |
| ICICI Prudential Equity & Debt Fund | Aggressive Hybrid | 17.9% |
| HDFC Balanced Advantage Fund | Dynamic Asset Allocation | 16.19% |
| SBI Equity Hybrid Fund | Aggressive Hybrid | 15.07% |
| Quant Multi Asset Fund | Multi-Asset Allocation | 15.31% |
| Bank of India Mid & Small Cap Equity & Debt Fund | Aggressive Hybrid | 17.75% |
| ICICI Prudential Multi-Asset Fund | Multi-Asset Allocation | 16.9% |
| Mahindra Manulife Aggressive Hybrid Fund | Aggressive hybrid | 21.1% |
| UTI Aggressive Hybrid Fund | Aggressive Hybrid | 13.5% |
| HDFC Hybrid Equity Fund | Aggressive Hybrid | 15.68% |
| Franklin India Equity Hybrid Fund | Aggressive Hybrid | 14.98% |
Hybrid Funds giving highest returns in last 5 years
| Hybrid Fund Name | Return |
| Quant Multi Asset Fund | 30.54% p.a. |
| ICICI Prudential Equity & Debt Fund | 26.47% p.a. |
| Bank of India Mid & Small Cap Equity & Debt Fund | 26.39% p.a. |
| HDFC Balanced Advantage Fund | 25.6% p.a. |
| ICICI Prudential Multi-Asset Fund | 24.89% p.a. |
| Quant Absolute Fund | 24.83% p.a. |
| JM Aggressive Hybrid Fund | 22.6% p.a. |
Read also: Top 10 Best Performing Mutual Funds in India 2024
How to Invest in Hybrid Mutual Fund
- You can initiate investment in hybrid funds through SIP (Systematic Investment Plan). Apart from this, you can also invest a lump sum amount or invest a one-time amount in hybrid funds.
- You can invest in hybrid funds with the assistance of a broker/agent, or you can also invest in hybrid funds on your own. If you prefer to invest on your own, you can use the services of a discount broker application.
Invest with the Groww App
- First, download the Groww app and register.
- Now, you will see the option for Mutual Funds; click on that.
- Next, search for Hybrid Funds, and you will find several funds.
- Now, you will see two options: Lumpsum and SIP.
- You can choose either of these options based on your preference and invest through the selected method.
Which type of investment is better, SIP or Lumpsum
If you have a good understanding of the market and a significant portion of your income available for investment, a lump sum investment could be a better option for you. On the other hand, if you are new to investing and have limited income, a Systematic Investment Plan (SIP) might be the best option for you.
Advantages and Disadvantages of the SIP Investment Plan
- The biggest advantage of SIP is that it develops financial discipline in you.
- You can start investing with a small amount.
- As your income increases, you can also increase your SIP.
- The drawback of SIP is that you cannot take advantage of a significant market downturn.
- If you forget to deposit the SIP installment, you may have to pay a penalty.
Advantages and Disadvantages of the Lumpsum Investment Plan
- If you invest in a hybrid fund through a lump sum, meaning a one-time investment, the biggest benefit is that you can take advantage of market fluctuations.
- In lump sum investment, you have to invest all at once, which allows you to avoid penalties.
- For lump sum investments, it is essential to have in-depth knowledge of the market as even a small mistake can lead to losses for you.
How much return is given in a Hybrid Fund
- Hybrid funds have different schemes, and their returns vary. In balanced hybrid funds, the average annual return has been around 20% over the past 5 years.
- Aggressive hybrid funds have seen an average annual return of up to 20% over the last 5 years.
- Conservative hybrid funds have shown an average annual return of up to 10% over the past 5 years.
- Hybrid equity savings funds have had an average return of around 11% over the last 5 years.
- Arbitrage funds have had a return of up to 6% during the same period.
- Hybrid multi-asset allocation funds have maintained a return of approximately 20% over the past 5 years.
Hybrid Mutual Fund – FAQs
Is it right to invest in hybrid funds or not?
If you prefer better returns with lower risk, hybrid funds could be a good option for you. However, you need to invest with caution for that.
What percentage of my income should I invest in hybrid funds?
You should invest at least 10% of your income in a hybrid fund through SIP.
Is a hybrid fund good for the long term?
Investing for a long period in hybrid funds can be a good option because they invest in both equities and provide a discount on the tax at 1 lakh in the long term.
What are Hybrid securities?
The term “hybrid securities” refers to financial instruments that combine features of both equity and bonds. These securities generate returns that mimic the performance of a company, similar to equity, or maintain a rate of return comparable to that of bonds.
There are two categories of securities: equity and bonds. In equity, investment makes us partial owners of the company, and bonds involve lending money to a company and receiving a specified income in the form of interest. Hybrid securities combine both types of security (equity and bonds) and their returns are based on the performance of underlying assets.
What is the difference between a Hybrid fund and a Balanced Fund?
The main difference between hybrid funds and balanced funds is that a balanced fund typically invests around 40-60% in equities and the remaining portion in debt instruments. On the other hand, a hybrid fund does not have a predetermined asset allocation; it can vary based on the fund manager’s perspective.
Who should invest in hybrid funds?
In today’s time, there are various types of funds available for investment. However, for someone who is starting to invest for the first time and does not want to take on too much risk, hybrid funds are a better option. This is because they work to maintain a balanced allocation of your investment, reducing the risk of potential losses.
When can I withdraw money after investing in a hybrid fund?
The money invested in a hybrid fund can be withdrawn at your judgment at any time. If you wish to withdraw your invested amount within one year, you may be subject to short-term capital gains tax. However, if you choose to invest your funds for an extended period, you may arouse long-term capital gains tax when redeeming. If you are considering investing in a hybrid fund, it is advisable to opt for a long-term investment, as it could be beneficial for you, and you may also qualify for tax benefits.
When is tax exemption available in hybrid funds?
In a hybrid fund, you do not directly receive a tax deduction; however, when you invest for the long term, as hybrid funds invest in equities where long-term capital gains are eligible for a tax exemption of up to INR 1 lakh, you can avail of this benefit.
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