Hybrid Mutual Funds, as the term suggests, invest in a mix of various asset classes like equities, debt, gold, and even real estate. Usually, most hybrid funds experiment between equities and debt instruments to create a diverse portfolio. They allocate assets in a blend of equity and debt so that they can tap the benefits of both. The equities can generate high returns but are also highly volatile whereas the debt can give stable returns at low risk. This evenly distributes the risk factor where debt securities can counterbalance the negative impact of equity markets. Otherwise, the equity can generate good returns when times are favorable.
Best hybrid funds have the potential to generate better returns than debt funds and are also relatively safer than equity funds. However, various types of hybrid funds have varying combinations of equity and debt securities where it allocates more funds to a particular asset category. Let’s understand in detail what hybrid funds are, their types, and if they are the same as balanced funds.
Hybrid Funds – Definition, Meaning and Features
Equity or debt funds invest more than 65% of the fund corpus in their respective asset categories, that is, equities/stocks and debt securities. In the case of Hybrid Funds, the asset allocation is such that the equity and debt instruments are in balanced proportion. It may invest 40-60% of the fund money in one asset class and the rest in the other. Hybrid funds can be equity-oriented if they invest more in equities, or debt-oriented if they allocate more funds to debt instruments. Some funds can dynamically change the asset allocation ratio depending on the market conditions.
Meaning of Hybrid Funds
Hybrid fund meaning is that it is a type of investment fund that combines elements of different investment styles or asset classes. For example, a hybrid fund may invest in a mix of stocks and bonds, or it may invest in both growth and value stocks. The goal of a hybrid fund is to provide investors with the potential for higher returns than a traditional bond or stock fund, while also offering some level of diversification and reduced risk. Hybrid funds can be actively managed or passively managed, and they are typically more flexible than other types of investment funds.
Features of Hybrid Funds
Hybrid funds are good for investors who want limited exposure to equities as well as debt. Some of the basic features of hybrid funds are:
- It has a diverse portfolio containing both equities and debt as well as other assets in its investment strategies. You invest in multiple asset categories through one fund
- Hybrid funds have a balanced portfolio where they can make the best of both asset classes. It endeavors to give higher returns with lesser risks and also to help you achieve both your short-term and long-term financial goals. Equity components help in generating wealth in the long run whereas the debt securities cushion against market fluctuations
- Good for investors who wish to have stable returns or want a better alternative to both equity and debt funds. As hybrid funds invest in multiple assets, there is little correlation between their risk factors, and that reduces the portfolio risk
- Various types of hybrid funds have different types of equity-debt combinations. They are designed to meet the financial needs and investment goals of different kinds of investors. It also caters to the risk tolerance of large-scale investors, from conservative and moderate to aggressive. For instance, it may invest more in stocks that are suited for investors with higher risk tolerance. While conservative investors will go for hybrid funds that invest more in debt
- The hybrid fund investment is apt for investors who can hold the units for at least 3 to 5 years. They say the longer the time horizon, the better. Hybrid funds can give fruitful results through wealth creation in the long run and income generation in the short-term
Types of Hybrid Funds
Hybrid funds can be categorized into various types based on their asset allocation and investment strategy. The different types of hybrid funds are listed below:
1. Equity-Oriented/Aggressive Hybrid Fund
Equity-oriented funds that invest more in equities than debt are called aggressive funds. They are considered riskier because of their higher equity components, but they also have the potential to generate high returns. These funds are suitable for aggressive investors who are willing to take on more risk in exchange for the possibility of higher returns. In an aggressive fund, 60-65% of the investible corpus is typically invested in equities, with the remaining portion invested in debt.
2. Conservative/Debt-Oriented Hybrid Fund
This fund allocates its resources in just the opposite manner as that of equity funds. It allocates about 60% to debt and about 40% to equities, making it apt for conservative investors. Debt-oriented funds cater to those investors that seek stable returns with low risk. Some funds also invest a little share in liquid funds, cash, or cash equivalents so as to influence the liquidity of the portfolio positively.
3. Balanced Hybrid Funds
Balanced funds are a type of hybrid funds that allocate funds to equity and debt classes on an almost equivalent proportion. They invest equal amounts in stocks and fixed income securities making it a healthy capital appreciation avenue with lower risks.
4. Balanced Advantage/Dynamic Asset Allocation Funds
Balanced Advantage Funds are similar to balanced funds, but they aim to balance the fund allocation to take advantage of market conditions. When the market is favorable, fund managers will allocate more funds to equities and purchase more stocks. When the market is fluctuating, they will shift to debt securities. This allows the fund to maximize profits and provide stable returns. The fund managers actively manage the funds and adjust the allocation of assets based on market conditions. This is why these funds are also known as dynamic asset allocation funds.
5. Multi-Asset Allocation Funds
The hybrid funds that invest in more than 2 asset categories with at least 10% of the fund in each are multi-asset allocation funds. They allocate funds in at least three asset classes like equity, debt, and any third one like gold, real estate, etc. Lesser risks than many hybrid funds as the corpus is allocated to multiple asset classes but also gives lower returns than equity-oriented ones.
6. Arbitrage Funds
Arbitrage funds capitalize on inefficient markets by simultaneously buying stocks and bonds in one market and selling it to the other. The fund managers use this strategy to make the most benefit out of the difference in prices in different markets. They usually buy in the cash market and sell in the future market to draw the capital. Fund managers have a tactical approach in exposing the fund corpus to both assets.
7. Monthly Income Plans (MIPs)
A monthly income plan (MIP) invests primarily in debt rather than in equities but gives better returns than pure debt funds due to the presence of equity elements. Funds may offer a growth plan where the dividends are added and reinvested. But you can also go for a dividend plan to get the profits as regular income from investment. You can payouts on a monthly, quarterly, bi-yearly, or yearly basis.
How to Invest in Hybrid Funds?
To invest in a hybrid fund, follow these steps:
- Research and compare different hybrid funds to find one that aligns with your investment goals and risk tolerance. Consider factors such as the fund’s investment strategy, past performance, fees, and ratings from independent organizations.
- Choose a brokerage firm or mutual fund company to invest through. You can invest in a hybrid fund through a traditional brokerage firm or online broker, or you can invest directly through the mutual fund company.
- Open an account with the brokerage firm or mutual fund company. You will typically need to provide personal information, such as your name, address, and Social Security number, as well as financial information, such as your income and net worth.
- Transfer funds to your account. You will need to have enough money in your account to cover the initial investment and any ongoing fees or expenses.
- Select the hybrid fund you want to invest in and specify the amount you want to invest. You can choose to invest a lump sum or set up regular investments, such as monthly or quarterly contributions.
- Review and confirm your investment. Carefully review the details of your investment, including the amount, fees, and any other important information, before submitting your investment.
Taxation in Hybrid Funds
The taxation norms for hybrid funds depend on their composition and the components that generate capital gains. Capital gains from equities are taxed according to the taxation norms for equity funds. Capital gains through debt components are subject to taxation as per the rules of debt funds. It further matters if it is long-term capital gain (LTCG) or short-term capital gain (STCG). STCG through equity is taxed at 155 and LTCG at 10% without indexation benefits if it exceeds Rs. 1 Lakh.
The debt component LTCG is taxed at 20% with indexation benefits and at 10% without indexation benefits. STCG through debt is added to the income and tax is deducted based on the income slab in which the individual falls. Arbitrage funds, which are often considered safe like debt funds, have the same tax calculation for long-term gains as equity funds.
Read More: Taxation of Mutual Funds
Wrapping it up:
Hybrid funds invest in a mix of assets, creating a balanced and diverse portfolio. This balance of equity and debt helps generate high returns and protects against market volatility. It is suitable for investors who want growth but with more security than equity funds. Hybrid funds, also known as hybrid mutual funds, come in a variety of asset allocation ratios to suit a range of investors. Some of the best hybrid funds offer strong performance and low fees.