Hybrid Funds: Meaning, Types, Benefits And How to Invest

0 min read

A hybrid fund is a type of mutual fund that invests in a mix of asset classes, such as equities (stocks), debt (bonds), and sometimes other assets like gold. These funds aim to balance risk and reward by diversifying investments, making them a preferred choice for investors seeking both growth and stability.

Hybrid funds cater to various investment goals, offering flexibility for conservative and aggressive investors alike. By understanding how hybrid funds work, their types, and benefits, investors can make informed decisions.

What Are Hybrid Funds?

A hybrid fund is a mutual fund scheme that invests in multiple asset classes to optimize risk-adjusted returns. These funds combine the growth potential of equities with the stability of debt instruments, offering a balanced investment approach.

Key Features of Hybrid Funds

• Diversified Portfolio: Invests in a mix of asset classes to balance risk and return.
• Risk Moderation: Reduces overall volatility by including debt components.
• Customization: Available in different variants to suit investors with varying risk appetites.

Hybrid funds are designed to cater to investors who prefer moderate risk with reasonable returns, making them ideal for both beginners and experienced investors.

Types of Hybrid Funds with Examples

1. Equity-Oriented Hybrid Funds

Invest a significant portion (65% or more) in equities and the rest in debt instruments. These funds are suitable for investors seeking capital appreciation with some level of stability. They carry higher risk compared to debt-oriented funds but offer higher returns.

Example: Suppose a hybrid fund allocates 70% of its portfolio to large-cap stocks and the remaining 30% to government bonds. This setup provides equity-driven growth while maintaining some stability through debt investments.

2. Debt-Oriented Hybrid Funds

Allocate a larger portion (more than 60%) to debt securities and the remaining to equities. These funds are ideal for conservative investors who prefer lower risk but still want some exposure to equities for moderate growth.

Example: Imagine a fund that invests 75% in corporate bonds and 25% in blue-chip stocks. This composition allows for steady income generation while taking advantage of limited equity participation.

3. Aggressive Hybrid Funds

Maintain a 65–80% allocation in equities and 20–35% in debt. These funds are riskier than balanced funds but less risky than pure equity funds, making them suitable for investors with a moderate risk appetite.

Example: A fund might invest 70% in mid- and large-cap stocks while keeping 30% in high-rated debt instruments. This setup provides growth potential while mitigating some downside risk.

4. Conservative Hybrid Funds

Invest 75–90% in debt instruments and the rest in equities. These funds are designed for low-risk investors seeking stability and steady income, such as retirees or those who prefer minimal market exposure.

For Example: Consider a fund that places 85% of its assets in government securities and only 15% in defensive stocks like FMCG companies. This ensures minimal volatility while offering some equity-linked returns.

5. Dynamic Asset Allocation Funds (Balanced Advantage Funds)

Description: These funds automatically adjust their asset allocation between equity and debt based on market conditions. They are ideal for investors who prefer professional fund management without actively adjusting their portfolios.

Example: If the stock market is performing well, the fund may increase its equity exposure to 80% and reduce debt holdings to 20%. During market downturns, it might reduce equity exposure to 40% and shift more towards bonds for stability.

6. Multi-Asset Hybrid Funds

Description: Invest in at least three asset classes (e.g., equity, debt, gold, or real estate). These funds provide high diversification, reducing overall portfolio risk.

Example: A fund may invest 50% in equities, 30% in debt instruments, and 20% in gold ETFs. This diversified structure helps mitigate risks associated with a single asset class.

7. Arbitrage Funds

Description: These funds capitalize on price differences in different markets to generate risk-free profits. They maintain at least 65% exposure in equities but function similarly to low-risk debt funds.

Example: If a stock is priced at ₹100 in the cash market and ₹102 in the futures market, an arbitrage fund buys in the cash market and sells in the futures market to lock in a risk-free profit of ₹2 per share.

How to Invest in Hybrid Funds?

Investing in hybrid funds is a straightforward process. Here’s how you can start:

Step 1: Define Your Investment Goal

Decide whether you want long-term growth, steady income, or moderate returns.

Step 2: Choose the Right Hybrid Fund Type

Select a fund that aligns with your risk tolerance and financial objectives.

Step 3: Research and Compare Funds

Analyze fund performance, expense ratios, and past returns before investing.

Step 4: Decide Between Lump Sum and SIP Investment

Lump Sum: Invest a one-time amount.

SIP (Systematic Investment Plan): Invest small amounts regularly to average out costs.

Step 5: Monitor and Rebalance Your Portfolio

Track fund performance periodically and make adjustments as needed.

Who Should Invest in Hybrid Funds?

Hybrid funds are suitable for a wide range of investors, depending on their risk tolerance and investment goals.

1. First-Time Investors

• Hybrid funds provide an easy entry into the equity market with lower risk.
• The debt component offers stability, making them ideal for beginners.

2. Conservative Investors

• Investors who prefer stability can opt for debt-oriented or conservative hybrid funds.
• These funds generate regular returns with limited equity exposure.

3. Long-Term Investors

• Aggressive hybrid funds and balanced advantage funds suit investors with a long-term horizon.
• These funds offer capital appreciation with controlled risk.

4. Retirees & Income Seekers

• Conservative hybrid funds provide steady income with minimal equity exposure.
• Investors seeking post-retirement income can benefit from these funds.

Benefits of Hybrid Funds

Hybrid funds offer multiple advantages, making them a preferred investment choice.

1. Diversification

• Spreads investments across asset classes, reducing overall risk.
• Ensures that poor performance in one asset class is offset by another.

2. Balanced Risk and Reward

• Provides equity growth while maintaining debt stability.
• Reduces the impact of stock market volatility.

3. Automatic Asset Allocation

• Some hybrid funds dynamically adjust the equity-debt ratio.
• Reduces the need for active monitoring by investors.

4. Tax Efficiency

• Equity-oriented hybrid funds enjoy lower long-term capital gains tax.
• Arbitrage funds offer tax benefits similar to equity funds.

5. Flexibility and Liquidity

• Hybrid funds can be redeemed anytime, offering high liquidity.
• Available in various plans like lump sum or Systematic Investment Plans (SIPs).

Conclusion

Hybrid funds are an excellent investment option for those looking to balance risk and return. By diversifying across asset classes, these funds offer stability, growth, and flexibility. Whether you’re a beginner or an experienced investor, hybrid funds provide a structured way to invest with moderate risk while enjoying the benefits of both equity and debt markets.

Frequently Asked Questions on Hybrid Funds

Q1. What is the ideal time to invest in hybrid funds?

Hybrid funds can be invested in at any time. However, dynamic asset allocation funds are ideal for volatile markets as they adjust the equity-debt ratio automatically.

Q2. How are hybrid funds taxed?

• Equity-oriented hybrid funds (65%+ equity) are taxed like equity funds—10% on long-term gains above ₹1 lakh.
• Debt-oriented hybrid funds are taxed like debt funds—based on individual income tax slabs.

Q3. Are hybrid funds better than pure equity funds?

Hybrid funds offer balanced risk and are better for conservative investors. Equity funds provide higher returns but come with higher volatility.

Q4. Can hybrid funds provide regular income?

Yes, debt-oriented hybrid funds and conservative hybrid funds are designed for steady income, making them suitable for retirees.

Q5. How long should I stay invested in hybrid funds?

Hybrid funds work best when held for the long term (3 to 5 years or more) to maximize benefits from both equity and debt exposure.

Suggested Reads: 

• What Is Stock Market And How It Works? A Comprehensive Explanation
• Bonus Shares: Meaning, Examples, Advantages, Disadvantages, & More!
• Stock Market Vs Share Market: Key Differences Explained in Detail
• Types of Stocks: Importance, Benefits & Beginner’s Guide to Investing