what is Hybrid Mutual Fund?

Introduction

Keeping in mind the risk tethered to them, investments can be classified as high-risk (or equity) investments, low-risk (or debt) investments, and hybrid investments. When investing, investors are advised to only invest in securities that match their financial goals, their ability to tolerate risk, and the time frame they wish to allocate to their investments. Different investors have different goals owing to which it is hard to classify them as solely high-risk or solely low-risk takers. It is against this backdrop that hybrid mutual funds gain credence.

Defining Hybrid Mutual Funds

Hybrid mutual funds can be defined as mutual funds that seek to create balanced portfolios by offering regular income to investors in addition to capital appreciation over a longer time frame. Fund managers responsible for hybrid mutual funds create a portfolio keeping in mind the objective of the scheme and allocate the funds in equity as well as debt instruments to varying degrees. Furthermore, the fund manager is responsible for buying and selling assets in the event of favourable market movements.

Examining Profiles Best Suited to Invest in Hybrid Mutual Funds

Hybrid mutual funds are understood to be riskier investments in comparison to debt funds however they are still safer than equity funds. These funds are more likely to offer superior returns in comparison to debt funds and are popular among several low-risk investors. Moreover, those new to investing who are uncertain about equity markets often gravitate towards hybrid mutual funds. This is owed to the fact that these funds have a debt component that

provides a layer of stability while also providing modest exposure to equity. Hybrid mutual funds, therefore, allow investors to gain the most from equity investments while providing them with a safety net against extreme volatility that arises in the markets.

Types of Hybrid Funds

Hybrid mutual funds can be classified as follows.

Equity-Oriented Hybrid Funds

These funds direct 65 percent – if not more – of their total assets towards equity and equity-related instruments belonging to companies that span varied market capitalizations and sectors. The remainder of their assets i.e., 35 percent or less, is directed towards investments made in debt securities as well as money market instruments.

Debt-Oriented Hybrid Funds

This form of hybrid funds invests a minimum of 60 percent of its total assets in fixed-income securities. These securities include but aren’t limited to debentures, bonds, and government securities. The remainder of the total assets i.e., 40 percent is directed towards equity investments. Certain funds may also channel a small portion of their capital towards liquid schemes.

Balanced Funds

Balanced hybrid funds direct at least 65 per cent of their total assets to equity and equity-related investments and the remainder of their total assets are invested in debt securities and cash. From a tax perspective, income drawn from such funds falls under equity funds and has a tax exemption applicable to long term capital gains of up to INR 1 lakh. The fixed income aspect of these kinds of hybrid funds makes them ideal for equity investors as balanced funds limit the volatility that equity investments bring with them.

Monthly Income Plans

This kind of hybrid fund primarily invests in fixed-income securities. A small portion of this fund’s total assets is directed toward equity and equity-related instruments. Owing to this fact, these plans are able to accrue superior returns in comparison to pure debt schemes. Monthly income plans provide their investors with a regular income stream. Growth options are available under monthly income plans and revolve around the income growing under the fund’s corpus.

Arbitrage Plans

This kind of hybrid mutual fund operates by buying stocks for a lower price in one market and selling them for a higher price in another market. This kind of fund’s fund manager is on the lookout for arbitrage opportunities at all times such that she/ he can maximize the fund’s returns. That being said, there are occasions during which good arbitrage plans aren’t available. In such scenarios, the fund directs its assets towards debt securities and cash. Arbitrage funds are understood to be as safe as debt funds. That being said, long-term capital gains drawn from this kind of hybrid fund are taxed in the same manner as equity funds.

Things to Consider Before Investing in Hybrid Funds

The investment in a hybrid fund comes with numerous benefits, but there are a few factors that investors should consider before investing:

Risk Analysis

When investing in a hybrid fund, the level of risk is correlated with the fund’s asset allocation. As a result, examining the fund’s makeup can be helpful.  Investors can look at the portfolio, where the corpus has been invested.

Analysing the Goal

Investors can evaluate their personal objectives in light of the scheme’s timetables and level of risk tolerance, and see if they align with your investments in hybrid funds. 

Benefits of Hybrid Funds

Investors Enjoy Access to Multiple Asset Classes

The fact that an investor can access several asset classes in a single product rather than investing in separate funds to address the requirement for various asset classes is one of the clear benefits of hybrid mutual funds.

Management of Risk

Through portfolio diversification and asset allocation, hybrid mutual fund investments include active risk management.

Diversification of Portfolio

The investments in hybrid funds give the proper benefits of diversification as the fund manager invests in different asset classes such as equity, debt, gold, etc.

Tax Implications on Hybrid Mutual Funds

Investing in hybrid mutual funds can incur three types of taxes:

• Long-Term Capital Gains- This tax applies to the money you make from your investment, depending on how long you’ve held it. If it’s an equity-focused hybrid fund, and you’ve held it for more than a year, you’ll be taxed at 10%. If it’s a debt-focused fund, the tax is 20% after holding for more than three years, but you get a benefit for inflation (indexation).
• Short-Term Capital Gains- The amount you earn before the fund reaches the long-term period is taxed differently for equity and debt. Equity gains are taxed at 15%, whereas for debt, the gains are combined with your other income and taxed based on your income tax slab.
• Tax on Dividends- If you’re getting dividends from your hybrid fund, that income is added to your total income and you’ll pay taxes on it based on your income tax bracket.

Concluding Thoughts

Hybrid mutual funds offer a strategic blend of risk and reward, making them an ideal investment choice for those seeking to balance the growth potential of equities with the stability of debt instruments. They are especially beneficial for beginners or cautious investors aiming for portfolio diversification and managed risk exposure. 

Ready to start your investment journey? Open your Demat account with Angel One today and start exploring diverse mutual funds to achieve your financial goals.

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