Hybrid Mutual Funds

Hybrid funds create a balanced investment portfolio that seeks to achieve a two-fold objective:

 

• Wealth creation in the long run through investment in equities

• Income generation in the short run by investing in debt securities

   

Fund managers allocate the amount of money that you invest in equities as well as debt securities. They may divert the remaining assets to money markets to achieve greater balance in your portfolio.

The following are some types of hybrid mutual funds that you may choose from:

• Multi-Asset Allocation Fund
   

The multi-asset allocation fund requires you to invest in three distinct asset classes. According to the rules by SEBI, each asset class must have a minimum of 10% allocation. 

 

With this fund, you get exposure to more than one asset class which makes it a less risky investment option. The fund manager may choose in which asset class to invest.  

• Aggressive Hybrid Fund
   

An aggressive Hybrid Fund requires a minimum investment of 65% in equities that can go up to 80%. The remaining 20% to 35% is to be allocated to the debt securities. 

 

Since a major portion of the investment is allocated towards equity funds, these funds have a high probability of earning higher returns. But, the risk is also higher than other variants. With some allocation to the debt asset class as well, they have a reduced risk when compared to the traditional equity asset class.

• Balanced Hybrid Fund
   

The balanced hybrid fund, also called the dynamic asset fund, allows investors to shift between debt allocation to equity allocation. These funds are further split based on the majority asset class chosen. As such, you will find equity-oriented or debt-oriented balanced funds.  

 

Fund managers can change the asset allocation based on the prevailing market scenarios. It saves investors from making losses when the market experiences volatility and fluctuations. 

• Conservative Hybrid Fund
   

A conservative hybrid fund can be understood as the exact opposite of an aggressive hybrid fund. This fund allows you to invest a minimum of 75% in debt asset classes that can go to 90%. The remaining 10% to 25% is allocated to equity mutual funds. 

 

The main objective of this fund is to generate a regular income while providing some higher returns through equity allocation. These funds are more suitable for those who have a lower risk appetite but still want to dabble into the equities market. 

• Equity Savings Funds
   

Also called hybrid equity funds, these funds aim to achieve a balance between returns and stability by investing in equities, debt securities, and derivatives. While derivatives and debt securities can reduce volatility, equity allocation can maximise the returns.

• Arbitrage Funds
   

With arbitrage funds, fund managers follow an arbitrage strategy. It involves purchasing debt securities from the money market and selling in the futures market for a margin that constitutes gains. 

 

Fund managers continuously look for arbitrage opportunities to maximise these gains. Since it involves simultaneous buying and selling, market fluctuations do have a significant impact on the returns.

The following are some of the features of hybrid mutual funds:

 

• Synthesis of Equity and Debt Funds: Since hybrid funds invest in both equity funds and debt securities, it is a perfect blend of the two. So, you get to enjoy the benefits of both funds.

• Portfolio Diversification: Investing in hybrid funds ensures that your investment portfolio remains balanced.  

• Lower Risks and Higher Returns: With these funds, debt securities reduce the risk factors involved, and equities ensure that you enjoy higher hybrid funds’ returns.

When investing in a hybrid fund, you get to enjoy the following benefits:

 

• Access to Multiple Investment Options: Hybrid funds allow you to access different asset classes, i.e., equities, debts, and other instruments, through a single fund. It saves you from investing in different asset classes to achieve their advantages.

• Risk Management: Since hybrid mutual funds also invest in debt securities, it brings down the risk factors associated with investments made solely in equities. It is best for those investors who wish to enjoy higher returns with reduced risk.

• Diversification of Portfolio: Hybrid funds diversify not only your portfolio across different asset classes but within those asset classes as well. For instance, they invest in large, mid, and small-cap when allocating assets to equity funds.

• Different Options Based on Risk Appetite: Since there are varied hybrid funds available, you can choose a fund that best suits your risk appetite. 

   

An aggressive hybrid fund may be best for those with a higher risk appetite. On the other hand, a conservative hybrid fund would be best for those with a lesser risk appetite.

In the case of equity funds, the units held for less than a year are taxed at 15% as Short-Term Capital Gain (STCG). However, any unit held for more than a year will attract a 10% tax calculated as a Long-Term Capital Gain (STCG).

 

On the other hand, according to the proposed Finance Bill 2023, all debt units will be taxed as STCG, irrespective of the period of holding.

The following are the types of risk associated with investing in hybrid funds:

 

• Risk of Losing Money: Since returns on equity funds are market-linked, they are highly volatile and depend on market fluctuations

• Price Risk: As equity-based funds are based on market fluctuations, their prices may dwindle based on market factors

• Event Risk: This is the price risk due to company or sector-specific event 

• Credit Risk: With debt securities, a defaulter risk is involved where the issuer may fail to pay you the principal and the interest

• Interest Risk: It is the risk of not earning the expected interest due to a reduction in the interest rate offered by the issuer

• Liquidity Risk: Liquidity risk is associated with both equities and debt, where you may not be able to withdraw or redeem the invested amount instantly

   

In conclusion, hybrid funds are one of the best investment instruments that provide you with a perfect blend of advantages of both equity and debt funds. While equity asset classes may maximise your hybrid funds’ returns, allocation to debt securities will reduce the risk profile.