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A Hybrid Funds Guide for India – Meaning, Features, Benefits & others

Investors who want to combine equity and debt in their portfolio can invest in hybrid funds. Hybrid funds are designed for investors looking for a safer portfolio with capital appreciation and returns.

Hybrid Funds

What are hybrid funds?

Hybrid funds invest in both equity as well as debt instruments. This mix is done for diversification of funds, risk, and return. 

Equity mutual funds invest in shares and stocks of other companies. It has the potential of higher return but also carries a high risk in comparison of debt mutual funds

Debt mutual funds invest in debt securities, treasury bills, corporate bonds. It provides a regular income to the investor and carries a low risk.

Both the mutual funds have their own pros and cons. Hybrid funds mix both the funds and aims to generate higher returns in exchange for lower risk depending on the investment goals of the investors.

What are the types of hybrid funds?

Below are the types of hybrid funds depending on the asset allocation towards equity securities and debt instruments.

Equity-Oriented Hybrid Mutual Funds

Equity– oriented hybrid funds allocate more than 65% of the total fund in equity and rest in debt instruments and money market securities. This way the funds gain higher returns and less risk at the same time. These funds are also known as aggressive hybrid funds

Debt-Oriented Hybrid Mutual Funds

Debt oriented- hybrid funds allocate more than 65% of the total fund in fixed income debt instruments, money market instruments like corporate bonds, government securities, treasury bonds, etc. the rest of the fund is allocated to equity i.e. shares and stocks of companies. Soe portion is also invested in cash and cash equivalents to maintain liquidity. These funds are also known as conservative hybrid funds

Monthly Income Plans

The monthly income plan is just like debt-oriented hybrid mutual funds, the majority of funds are invested in debt instruments. The idea is to provide a regular income to the investor through the dividend. The payout is at the will of the investor i.e. monthly, quarterly, annually or growth option. In case of growth option, the investor can choose to re-invest a portion or all of the return earned in the fund itself. This way the capital of the fund gets appreciated leading to higher returns.

Arbitrage Funds

These funds buy and sell the shares and stocks at the same time. Stocks are bought at a lower price from the cash market and sold in the future market at a higher price. The difference becomes profit. Arbitrage funds are relatively safer than equity-oriented funds. 

How does a hybrid fund work?

There are 2 goals of any hybrid fund, capital appreciation in the long term and higher return in the short term. To achieve these 2 goals hybrid funds pick a mix of equity and debt. 

Investing in equity provides capital appreciation and stability to the funds invested. Investment in debt instruments provides returns in the form of dividends and interests. Hybrid fund managers do asset allocation, market analysis, diversification of funds to ensure risk, return and capital appreciation are in place.

Asset allocation means allocating funds to different classes of assets available in the market i.e. bonds, bills, gold, etc.

Diversification of funds is a process in which the asset is chosen is such a manner to balance the risk and return matching the investment goals.

Why invest in a hybrid fund?

Equity mutual funds provide returns with higher risk, ideal for investors who don’t mind taking the risk of capital and expect inflation-beating returns over the long term.

Debt mutual funds offer regular and lower return with lower risk, ideal for investors who don’t want to take high risk and accept lower returns

Hybrid funds combine the risk and return both the funds offer and provide a blend of risk and return. Hybrid fund management involves risk management, portfolio diversification, and asset allocation. This is the reason why it is ideal for investors who look for a balance of risk and rewards.

Ways to Invest in hybrid funds

The investment can be made in 2 ways, either through a lump-sum investment or SIP

  • Lump-sum investment- The entire investment amount is invested at once and returns start flowing thereon
  • SIP- The investor invests a fixed amount of his choice at fixed intervals. Here the benefit is that the investor can anytime change the lower or increase the amount of investment. An investor can also change the investment period say from 6 months to say a year or end the investment.

Tax on hybrid funds

Equity Component of the fund

Long term capital gain over Rs 1 lakh is taxed at a rate of 10%

Short Term capital gain is taxed at a rate of 10%

Debt Component of the Fund

Long term capital gain is taxed at 20% after indexation and 10% without the benefit of indexation

Short term capital gain will be added to the total income and taxed at slab rate

Published on January 17, 2020