Are you wondering what is Hybrid Mutual Funds? Let us explain this to you!! Mutual funds that engage in more than one asset category are hybrid mutual funds. They are often a mix of equity and debt assets, but they may also contain gold or real estate. If you are beginning your investment journey, it will be helpful to know your options. Let’s understand the hybrid mutual funds meaning!
What are Hybrid Funds?
The hybrid fund meaning is quite easy to understand. Let’s discuss this in detail-Hybrid funds are mutual fund schemes that offer diversification across two or more asset types. The term “hybrid” denotes a portfolio that invests in various asset classes. These funds are often known as investment strategy funds since they generally invest in equities, debt and other assets. Hybrid mutual funds provide investors with a diversified portfolio since they invest in various assets. As a result, investors can invest in numerous asset types through a single fund. These funds have different risk tolerance levels, ranging from conservative to moderate, relatively high, and aggressive.
Investment choices within an asset class usually have a high degree of correlation in returns since the risks and variables impacting returns are comparable. Still, investment choices across asset classes have less correlation with returns. Combining assets with low correlation can help to decrease portfolio risk. Hybrid mutual funds distribute investments across different asset classes to maximise returns while minimising risk.
- A money market fund is a type of mutual fund which invests in short-term, highly liquid assets. These products include cash, cash-equivalent securities, and debt-based securities with short maturity and a high credit rating.
- Money market funds are unique in three ways:
- The investments made by these funds are typically stable and safe.
- The initial investment is little.
- Accessibility.
How do Hybrid Mutual Funds Work?
Hybrid Funds are a part of mutual fund schemes. The investor invests multiple assets, including equity, debt and more such classes of assets. The kind of assets set depends upon the investor and how much risk they are willing to take, and their overall objective of investing.
The reason why people are inclined towards the hybrid model of funds is that it diversifies the portfolio of the investor and gives a wider area to work on in the future.
Key Takeaways
- Investment in hybrid funds combines equity and debt, which is more suitable for conservative investors who can bear the balanced risk
- Diversification and rebalancing always try to hit the risks and maintain the return risk profile of the fund
- Direct hybrid funds schemes are available, which reduce the expense ratio
- Active management with parallel to market indicators and movement
Types of Hybrid Funds
Before we start to discuss about top 10 hybrid mutual funds, we must know about the types of hybrid funds to understand the difference. Here are the types of hybrid funds-
Multi Asset Allocation Fund
These funds must invest in at least three asset classes, with a minimum of 10%. Each has a wider range of asset classes, with asset allocation determined by the fund manager’s opinion.
Balanced Hybrid Funds
These funds invest between 40 and 60% of their assets in equities and debt. The goal is to achieve long-term capital growth through equities asset allocation while balancing risk through debt allocation.
Aggressive Hybrid Funds
These funds must invest a minimum of 65 to 80% in equity and 20 to 35% in debt. They provide the opportunity for large profits with little risk due to the low debt allocation.
Balanced Advantage Fund
These funds are dynamic, allowing them to change from 100% debt to 100% equity. The asset allocation is determined using the fund’s financial model’s recommendations. Investors that want to manage their investment strategy may consider these funds.
Equity Savings Fund
These funds invest in equity, derivatives, and debt to balance risk and return. Derivatives decrease directional stock exposure, lowering volatility and increasing return stability. The stock asset provides growth and debt, whereas the derivative asset delivers consistent, predictable returns. These funds invest 65 to 100% of their assets in equities and 0 to 35% in debt.
Arbitrage Fund
These funds are hybrid in nature, as the investor has an option to invest in sizeable lumps in enhancing their portfolios. The returns, however depend upon the elasticity of the assets.
Read More: Best Performing Mutual Funds in India
Features & Benefits of Hybrid Funds
- Access numerous types of assets with a single fund: One of the evident benefits of hybrid mutual funds is that, rather than investing in multiple funds to suit the needs of different investment vehicles, an investor may access numerous types of assets in a single item.
- Active risk management: Hybrid mutual funds provide active risk management through asset allocation and asset allocation. They mitigate risk by mixing asset classes that are not linked, such as stock and debt.
- Adapts to varied risk profiles: These funds may cater to a wide range of risk tolerances, from conservative to moderate to aggressive. There are ownership schemes for risk-takers and debt-oriented schemes for risk-averse investors. There is a dynamic investment strategy fund for individuals who don’t want to keep to a preset investment portfolio but want to move based on market views without making the decisions themselves. Arbitrage is a strategy for investors seeking reliable profits in a fluctuating market.
- Buying low and selling high: The fund managers rebalance the portfolio to alter the investment strategy within the acceptable range, resulting in the sale of one asset class at a high price and the purchase of another at a low price.
- Automatic portfolio rebalancing: The fund management adjusts the portfolio as needed, and the investor is not obligated to do so. They help you save time and effort by tracking markets and managing your asset allocation.
Things to Consider Before Investing in Hybrid Funds
- Returns: Hybrid funds do not provide guaranteed returns; they are influenced by the performance of the underlying investments and the fund’s equity exposure. Their performance trails that of funds with a 100% stock allocation in a rising market, but they outperform pure equity funds in a declining market. Dynamic asset allocation funds can move freely between equity and debt, increasing or decreasing their allocation to stocks and debt based on the results of financial models used to manage the fund.
- Risk: The risk in a hybrid fund is mostly determined by the portfolio’s equity holdings. The higher the equity component, the higher the risks determined by the segment of the stock market in which the fund invests and the strategy employed.
- Time horizon: Hybrid funds are best suited to investors with a medium-term horizon of 3-5 years. The larger the time horizon, the more likely you will achieve consistently higher profits.
- Expense ratio: Like all other mutual funds, hybrid funds have an expense ratio. The investor benefits from a lower expenditure ratio. Although a high expense ratio influences fund returns, it is not always true that a high expense ratio means low returns.
- Investing strategy: It’s vital to remember that the fund managers choose the assets to invest in, the quantities in each asset, and the investment style. Investors have no control over how the different components are selected or blended.
Reasons Why You Should Invest in Hybrid Funds
Here are the key points why you should invest in hybrid funds:
- Balance of risk and returns
- Investor is in control of the returns
- Different assets can be invested
- Low risk
- Portfolio takes a great turn for the investor
- Hybrid of equity and debt, depending upon the needs of the investor.
How to Invest in the Best Hybrid Mutual Funds in India?
Consistency of return, fund leadership team, corpus, risk, return, and expense ratio are all factors on which hybrid funds are judged. The best hybrid funds have regularly ranked in the top 25% of their peers. However, it’s vital to consider their risk to get those results. It’s also crucial to look at the inception date to get a sense of the company’s lifespan and success throughout time. The best hybrid plans also have a large enough corpus. It should not be too little to receive insufficient attention, nor too huge to be challenging to manage. An experienced fund management staff with a strong research foundation and market understanding is also important when deciding.
List of Best Hybrid Mutual Funds
From the table given below individuals can figure out the top 10 hybrid mutual funds-
| Fund Name | 3-year Return (%)* | Expense Ratio (%) |
| Quant Absolute Fund Direct-Growth | 27.52% | 19.50% |
| Quant Multi-Asset Fund Direct-Growth | 29.67% | 18.75% |
| ICICI Prudential Equity & Debt Fund Direct-Growth | 18.50% | 14.30% |
| ICICI Prudential Multi-Asset Fund Direct-Growth | 18.30% | 13.96% |
| ICICI Prudential Thematic Advantage Fund (FOF)Direct-Growth | 20.73% | 13.71% |
| BOI AXA Mid & Small Cap Equity & Debt Fund Direct-Growth | 20.36% | 1.55% |
| Kotak Equity Hybrid Fund Direct-Growth | 16.56% | 0.66% |
| Baroda BNP Paribas Aggressive Hybrid Fund Direct-Growth | 15.64% | 0.64% |
| Edelweiss Balanced Advantage Fund Direct-Growth | 14.50% | 0.46% |
| Canara Robeco Equity Hybrid Fund Direct-Growth | 14.10% | 0.64% |
*Last updated as of 21st October 2022
Tax Implications of Hybrid Funds
Long-Term Capital Gain
When it comes to long-term capital gains in hybrid funds, they are taxed similar to equity funds. The gains cross Rs. 1 lac considering the tax rate is 10%.
Short-Term Capital Gain
In the case of short-term capital funds, the tax rate is 15% on the equity component.
Conclusion
The investment strategy and diversification are two main ideas underpinning hybrid funds. They want to increase capital appreciation by allocating to stocks and minimise portfolio volatility by giving to debt. Hybrid funds cater to a wide range of risk appetites, from conservative to moderate to aggressive. They’re an excellent place to start for new investors in the stock market, and they may also help save for any medium-term objective.
Frequently Asked Questions
As the name indicates, hybrid funds invest in a mix of asset classes. These securities might be debt/fixed deposits, equities, or commodities (gold). For the most part, hybrid funds invest in debt and equity in varying quantities. Hybrid funds include both balanced and unbalanced funds. As the name implies, balanced funds invest equally in stocks and FD-like products. These funds offer a well-balanced portfolio with both growth and stability.
Conservative hybrid funds invest largely in FD-like securities, with a small percentage of their assets in equities. These funds aim to offer higher returns than bank term deposits while avoiding excessive risk.
These funds are suitable for new investors who don’t want to manage their investment strategy. However, because virtually all funds will include equity exposure, you should be prepared for volatility.
Dividends are taxable in the hands of the investor starting this fiscal year (2020-21), so they must be included in the investor’s total income and taxed as per the slab applicable. If the dividend from hybrid funds or any other mutual funds exceeds Rs 5,000 in a financial year, 10% TDS would be deducted by the AMC (FY).
Here are a few hybrid mutual funds: Quant Absolute Fund Direct-Growth, Quant Multi-Asset Fund Direct-Growth, ICICI Prudential Equity & Debt Fund Direct-Growth, and ICICI Prudential Multi-Asset Fund Direct-Growth.
Currently, Quant Absolute Fund Direct-Growth as is leading the market with a growth return rate of 32.10%.
As of now, Quant Absolute Fund Direct-Growth with 32.10% returns.
Reliance Small Cap Fund, HDFC Small Cap Fund, Kotak Emerging Equity Schemes and Invesco India Multi-Cap Fund are top mutual funds to boom in the coming years.
Also read about NAV in Mutual Funds on Investment Simplified.
