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Hybrid Funds

Hybrid Funds invest in a mix of asset classes. Most Hybrid Funds invest in equity and debt although there are funds that have more asset classes like gold, international equities, etc. in their portfolio.

  • Hybrid Funds allow you to have a diversified portfolio with just one fund
  • Invest in them for goals you want to achieve in 3 to 5 years
  • Multi-Asset Funds give you exposure to at least 3 asset classes together

Types of Hybrid Funds

By Equity-Debt Allocation
By Solutions
Dynamic Asset Allocation

Adjusts the allocation in various asset classes due to market conditions to provide superior returns

Multi Asset Allocation

Invests across multiple asset classes ranging from equity & debt to others

Retirement Solutions

Uses asset allocation to build retirement corpus

  • Arbitrage

    Capitalizes on ineffecient markets

  • Hybrid FoF

    Readymade portfolio of equity and debt funds

All about Hybrid Mutual Funds

  • How Hybrid Fund Works?

  • Who Should Invest in Hybrid Funds?

  • Tax Implications on Hybrid Funds

How Hybrid Fund Works?

  • Hybrid funds predominantly invest in two asset classes, equity, and debt. Equity as an asset class has the potential for generating good returns and creating wealth but, at the same time, carries higher risk in terms of volatility in the shorter term. On the other hand, debt as an asset class includes interest-bearing instruments that generate regular income. Debt is a lower-risk asset class as compared to equity. Equity and Debt Asset classes have low correlation, and hence combining them reduces the portfolio risk.
  • A hybrid mutual fund essentially tries to offer the best of both the asset classes in a single product. Their Equity portion generating returns when the equity markets are doing well, and the Debt portion provides a cushion for the times that the market is under-performing. It aims to offer long-term capital appreciation through equity and short-term stability and regular income through debt. Based on the objective of the fund and the market outlook, the fund manager maintains the appropriate asset allocation at all times.

Hybrid funds are very versatile and good investment options for both new and seasoned investors.

  • First Time Mutual Fund Investors: Investors who are new to investing are used to the stability provided by traditional fixed income instruments like fixed deposits. They understand the growth generating capacity of the equity asset class, but, fear the risk of volatility over the short term. Hybrid Mutual Funds offer an entry into the equity market, and based on their risk profile, they can pick a subtype with the equity exposure that they are comfortable with.
  • Investors with a 3-5 year investment horizon: Investors looking to invest for a medium-term goal, like buying a car, need growth but with reduced volatility. Hybrid funds provide a good option for this category of investors. That's because a part of the investment is in debt, the returns generated are relatively less volatile.
  • Retired Individuals: This category of investors is looking for a regular income to replace their salaries or income that they made in the working years. Conservative hybrid funds with its unique asset allocation provide a regular income through the debt component and aim at generating a little more through their exposure in equity, which will help them tide over the inflation through the retirement period.
  • Investors looking for asset allocation: These investors want a portfolio with a certain asset allocation but have not time or expertise to track the markets and manage their asset allocation. Hybrid funds are an excellent option for ready-made investment portfolios.
  • Short term investors: Arbitrage funds provide a good, tax-efficient option for investors that are looking to park money in volatile market conditions over a minimum 6-month time frame. Learn How to pick the right Hybrid Fund?

A fund that has a minimum of 65% in equity or equity-oriented securities is deemed as an equity-oriented fund for the benefit of computing tax. All other schemes are deemed as Other schemes

1. Equity Oriented Schemes:

Equity-oriented hybrid funds and arbitrage funds are classified as equity-oriented funds for tax purposes. Equity schemes have a favorable taxation regime in comparison to the other schemes.

  • Long Term Capital Gains: If equity mutual funds are held for more than a year, they qualify for long-term capital gains tax of 10 percent. Gains of up to ₹1 Lakh in a financial year are tax-free.
  • Short Term Capital Gains: If these schemes are held for less than a year, gains are treated as short-term capital gains and are taxed at 15 percent.

2. Other Schemes:

  • Long Term Capital Gains: Long-Term gains on units held for more than 36 months are taxed at the rate of 20 percent after providing for indexation.
  • Short Term Capital Gains: For other schemes that are held for less than three years are treated as short-term capital gains and will be added to the income and taxed as per the income tax slab applicable to the investor.

Frequently asked questions

Which hybrid fund is best?

The best Hybrid Fund will be the one that matches your risk profile. For instance, the Dynamic Asset Allocation Fund / Balanced Advantage Funds category is suitable for investors who wish to free themselves from the hassle of tracking markets by automating their asset allocation. Similarly, Conservative Hybrid Funds are suitable for risk-averse investors whose priority is the safety of capital but are willing to take a small allocation into equities so they can earn better returns than FDs.

Advantages of Hybrid Funds include the inherent asset allocation available in these schemes. Hybrid Funds invest in a combination of asset classes like equity, debt, gold, and even international ETFs. Since prices of these asset classes move in opposite directions, your portfolio's risk goes down.

Hybrid Funds invest in a combination of asset classes like equity, debt, gold, and even international ETFs. On the other hand, Debt Funds primarily invest in fixed income securities such as bonds issued by the government and corporates.

There are 7 sub-categories of Hybrid Funds and Balanced Hybrid Fund is one of the 7 sub-categories. Balanced Hybrid Funds invest 40% - 60% of their assets in equities and the rest in debt.