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What are Hybrid Mutual Funds?

Hybrid funds invest in more than one asset class including equity, debt, gold etc. and aim to create a diversified portfolio for the investor. The portfolio and asset allocation of the hybrid mutual fund may depend on the investment strategy adopted. Based on the investment strategy, the risk level of the fund may differ. There are many types of hybrid funds, they include:

• Arbitrage Funds:

  These funds are equity-oriented hybrid scheme that aims to leverage arbitrage opportunities in the market. Arbitrage funds are mandated to invest a minimum of 65% of their total assets in equity and equity-related instruments. The fund manager may buy and sell shares in different markets simultaneously and aim to gain returns due to the price difference between the cash and derivative. Arbitrage funds are also invested in short-term money markets and debt securities. Due to this investment strategy and asset allocation, these are low-risk and short-term hybrid funds.

 
• Equity Savings Funds:

  These are hybrid funds that invest across debt funds, equity funds, fixed-income securities and arbitrage funds. According to the mandate, equity savings funds are required to invest a minimum of 65% of their total assets in equity and equity-related instruments. A minimum of 10% of the fund`s assets need to be invested in debt instruments. Due to this diversified asset allocation, equity savings funds have a low to moderate risk level and may be suitable for long-term capital growth.

 
• Balanced Advantage Funds:

  These hybrid mutual funds are also known as dynamic asset allocation funds. The fund changes its asset allocation based on market conditions. Balanced advantage funds are mandated to invest at least 65% of their portfolio in equity-related instruments. The remaining corpus can be invested in debt and money market instruments. This fund is a moderately high-risk investment, suitable for potential long-term wealth creation.

 
• Conservative Hybrid Funds:

  These hybrid mutual fund schemes invest mainly in debt securities. They are mandated to invest between 75%-90% of their total assets in debt instruments. A minimum of 10% and a maximum of 25% of the funds corpus must be allocated to equity and equity-related instruments. They may be suitable for investors with a conservative investment strategy, seeking diversification of their assets.

 
• Multi Asset Allocation Funds:

  This is a type of hybrid fund that is mandated to invest a minimum of 10% of its corpus in at least three asset classes each. This diversification may potentially help investors earn optimal returns in the long run. However, it is a high-risk hybrid fund.

 
• Aggressive Hybrid Funds:

  This fund primarily invests in equity and equity-related securities. The fund is mandated to invest between 65%-80% of its total corpus in equity and equity-related instruments. The fund also invests in debt instruments; between 20%-35% of the fund’s total assets must be invested in debt instruments. This asset allocation aids diversification and potentially reduces risks. They are a high-risk and long-term investment option.

 

Tax on hybrid mutual funds in India varies based on the asset allocation. Equity-oriented hybrid mutual funds allocate at least 65% of their corpus in equities. These hybrid mutual funds are subject to STCG and LTCG tax. STCG tax is levied on units held for less than one year at 15%. LTCG tax is levied on units held for over one year at 10% with indexation benefits.

Balanced hybrid funds and conservative hybrid mutual funds in India are subject to STCG tax for units held for less than three years. The potential returns earned are added to the investor`s income tax slab and taxed accordingly. LTCG tax is levied on units held for longer than three years at 20% with indexation benefits.

Who Should Invest in Hybrid Funds?

Hybrid mutual funds may be a suitable investment option for investors seeking portfolio diversification. A diversified portfolio may be relatively less susceptible to risks and investors may potentially benefit from the performance of various sectors.

Equity-oriented hybrid mutual funds may have a relatively higher level of risk due to their investment in equities. Equity investments are vulnerable to volatile market conditions and fluctuations. This type of hybrid fund may be suitable for investors with a high-risk appetite.

Debt-oriented hybrid funds may have a relatively low level of risk due to their investment in fixed-income securities and money market instruments. As a result, debt-oriented hybrid funds returns may be relatively low. While debt-oriented hybrid mutual funds may have a lower level of risk, all investments have some risks such as price risk, interest rate risk, re-investment risk etc. These funds may be suitable for investors with a low-risk appetite.

Investors must carefully consider their investment horizon, risk tolerance and financial goals before investing in any mutual fund scheme. It is important to read all scheme-related documents carefully.

FAQs

• What is the meaning of hybrid funds?

  Hybrid funds in mutual funds are a type of investment scheme that invests in a variety of asset classes such as debt, equity, money market instruments,gold etc. They aim to provide investors with a diversified portfolio.

 
• How to invest in hybrid mutual funds in India?

  You can invest in hybrid funds through our website. All you have to do is select the scheme you wish to invest in and select Invest now on the scheme page. Post this you need to login and fill in the required details, select the payment method and submit the transaction.

 
• What are the types of hybrid funds?

  Arbitrage funds, aggressive hybrid funds, multi-asset allocation funds, balanced advantage funds, conservative hybrid funds and equity savings funds are some of the types of hybrid funds. These funds have different asset allocation strategies and risk levels.

 
• Are hybrid funds returns high?

  Returns of hybrid funds may vary based on the investment strategy, asset allocation and market conditions. Arbitrage funds may be a low-risk-return investment option. Hybrid equity fund returns may potentially be higher in the long run.

 
• Are hybrid funds risky?

  Some hybrid funds may be a risky investment option. For example, aggressive hybrid funds, balanced advantage funds, and multi-asset allocation funds may be high-risk-return investments. Contrarily, arbitrage funds and equity savings funds may have relatively lower risk. The risk level of hybrid funds depends on the investment strategy and asset allocation.

 
• Are hybrid funds tax-free?

  No, hybrid funds are not tax-free. All hybrid funds are subject to taxation. Tax on hybrid mutual funds varies based on the asset allocation. Debt-oriented and balanced hybrid funds are subject to STCG tax based on the investor's income tax slab. LTCG tax is levied at 20% with indexation benefits. Equity-oriented hybrid funds are subject to STCG tax at 15% and LTCG is levied at 10% with indexation benefits.