Hybrid Mutual Funds: Types, Benefits, How It Works & Who Should Invest

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Today, traditional savings accounts yield minimal returns and trading in the stock market can be difficult. Thus, one option that balances safety and growth potential is the Hybrid Mutual Fund. Mutual funds aggregate money from several participants to invest in a diverse portfolio of stocks, bonds, and other assets.

They offer a convenient way for individuals to access professional fund management and a diversified investment portfolio without needing hands-on management.

what is a hybrid fund?

A hybrid mutual fund is a type of mutual fund that invests in more than one asset class, such as equity and debt.

These funds are designed to provide an investing option to investors with a moderate risk tolerance. The goal is to build a balanced portfolio with growth and yielding assets. But only this much information is not sufficient to invest in these funds. Thus, read ahead to explore what are hybrid mutual funds, their features, popular types of hybrid funds, and more.

What are the Features and Benefits of Hybrid Mutual Funds?

Hybrid mutual funds offer several features. Some of them are:

1. Higher Returns and Diversification

Hybrid Mutual Funds invest in equity and debt, striving for better hybrid fund returns than traditional options like fixed deposits. This diversification harnesses the growth potential of equities while maintaining stability through debt instruments.

2. Lower Risk Through Asset Balancing

These funds balance risk by combining the high-return nature of equity with the lower-risk characteristics of debt. This equilibrium leads to reduced volatility compared to investing solely in equities.

3. Stability and Risk Management

Hybrid Mutual Funds are designed to provide stability in returns. Equities are known for their volatility, while debt instruments offer stability. By combining both, these funds aim to create a more stable investment option while effectively managing risk.

4. Enhanced Diversification

Hybrid funds provide a convenient way to access multiple asset categories within a single investment, reducing the need for managing multiple investments separately.

5. Active Risk Management

These funds employ active portfolio diversification and asset allocation strategies to effectively manage risk by balancing investments in different asset classes.

Best Performing Hybrid Mutual Funds

There are several top hybrid mutual funds. They are:

Fund Name	NAV	CAGR (%)
Fund Name	NAV			1Y	2Y	3Y	5Y
Kotak Balanced Advantage Fund	17.69	18.39	11.71	10.63	11.98
Kotak Equity Savings Fund	23.19	18.75	12.23	11.53	-
Kotak Equity Arbitrage Fund	34.09	7.78	6.27	-	-
Kotak Equity Hybrid Fund	51.30	25.15	15.09	15.44	17.49
Kotak Multi Asset Allocation Fund	11.21	-	-	-	-

Report as on Feb 29, 2024

Types of Hybrid Funds

There are several types of hybrid Funds. Some of them are:

By Equity-Debt Allocation	By Solutions	Others
Aggressive Hybrid Equity Savings Conservative Hybrid	Dynamic Asset Allocation Multi-Asset Allocation Retirement Solutions	Arbitrage Hybrid FoF (Fund of Funds)

A. By Equity-Debt Allocation

Equity-debt allocation refers to the proportion of a fund’s assets invested in equities (stocks) and debt (bonds). The allocation can be aggressive (more equities) or conservative (more debt), depending on the fund’s investment strategy.

1. Aggressive Hybrid

These funds invest a larger portion (65-80%) in equities and the rest in debt instruments. They aim for higher hybrid fund returns but come with higher risk.

2. Equity Savings

These funds invest in equities, arbitrage, and debt. They aim to provide stable returns with lower risk.

3. Conservative Hybrid

These funds invest a larger portion (75-90%) in debt instruments and the rest in equities. They aim for stable returns with lower risk.

B. By Solutions

These funds aim to provide specific solutions or benefits to investors. They are of the following types:

1. Dynamic Asset Allocation

These funds adjust the allocation between equity and debt based on market conditions.

2. Multi-Asset Allocation

These funds invest in more than two asset classes, such as equity, debt, and gold.

3. Retirement Solutions

These funds aim to provide a retirement corpus by investing in equity and debt.

C. Others

Additional hybrid fund types include:

1. Arbitrage

These funds exploit price differences in different markets for the same asset to generate returns.

2. Hybrid FoF (Fund of Funds)

These funds invest in other mutual funds, providing diversification across fund houses and strategies.

How Does a Hybrid Mutual Fund Work?

A hybrid mutual fund invests in both equity and debt securities. The equity portion generates returns when the equity markets are doing well, and the debt portion provides a cushion for when the market is underperforming. It aims to offer long-term capital appreciation through equity and short-term stability and regular income through debt. The fund manager always maintains the appropriate asset allocation ratio based on the fund's objective and the market outlook.

Who Should Invest in Hybrid Mutual Funds?

Hybrid mutual funds are suitable for investors seeking a balanced mix of stocks and bonds in a single investment vehicle. They are ideal for individuals looking to diversify their portfolios while managing risk. These funds are well-suited for conservative investors who prefer a moderate risk profile, as they provide exposure to equities for potential growth and bonds for stability.

Additionally, those with a medium to long-term investment horizon can benefit from the combination of asset classes. Investors should assess their risk tolerance and financial goals before considering hybrid funds to ensure they align with their investment objectives.

How to Invest in Hybrid Mutual Funds Online?

Investing in mutual funds is a strategic way to accumulate wealth and meet financial objectives. You can do so by following these simple steps:

1. Define Goals

Identify your financial targets, such as retirement planning, home purchase, or wealth creation. Clear goals aid in choosing a suitable investment.

2. Choose Appropriate Funds

Mutual funds vary in risk and return potential. Identify your risk tolerance and select funds that align with your profile.

3. Open an Account

You’ll need an investment account, which can be opened through brokerage firms or online platforms. Complete your KYC process before investing.

4. Diversify Investments

Spread your investments across multiple funds and asset classes to reduce risk and maintain a balanced hybrid fund portfolio.

Factors to Consider Before Investing in a Hybrid Fund in India

Before investing in hybrid funds in India, consider these key factors:

1. Risk-Return Evaluation

The risk in hybrid funds corresponds to the asset allocation in the portfolio. Analysing the scheme’s portfolio provides insight into potential risks.

2. Selecting the Appropriate Hybrid Fund

When selecting a hybrid fund, consider your risk tolerance, financial objectives, and investment timeframe. If you require regular income, a debt-oriented hybrid fund may offer better returns than a pure debt fund due to the equity component.

3. Fund Manager’s Track Record

The fund manager’s expertise and track record play a crucial role in the fund's performance. Examine the historical performance of other investment funds overseen by the same individual to gain insights into their investment approach and track record of success.

Taxation Rules of Hybrid Mutual Funds

The taxation rules of hybrid mutual funds hinge on their equity exposure. If the equity exposure surpasses 65%, the fund is treated like an equity fund, with a 15% short-term capital gains tax. For long-term gains exceeding Rs 1 lakh, a 10% tax applies. Below 65% equity exposure, debt fund taxation rules apply, with short-term gains taxed at the investor's income tax slab rate. Similarly, long-term gains are taxed at 10% on amounts exceeding Rs 1 lakh. Knowing the fund's equity exposure is crucial for informed investing and tax planning.

Conclusion

It is also important to evaluate the consistency of their returns, risk management, and ability to adapt to changing market conditions. However, it’s crucial to remember that past performance does not guarantee future results, and other factors, such as market conditions and economic variables, can influence fund performance. Thus, you must thoroughly research and then invest the money.

Frequently Asked Questions

1. What is a hybrid mutual fund?

A hybrid mutual fund combines different asset classes, typically stocks and bonds, in a single portfolio. It aims to provide diversification and balance risk and returns.

2. What are the risks of investing in a hybrid fund?

Risks include market fluctuations, interest rate changes, and the performance of both equity and debt components. Hybrid funds are subject to the risks associated with the underlying asset classes.

3. Are hybrid and balanced funds same?

Yes, the terms "hybrid" and "balanced" are often used interchangeably in the mutual fund context. Both refer to funds that invest in a mix of asset classes.

4. Are hybrid mutual funds good or bad?

The suitability of hybrid funds depends on individual investment goals and risk tolerance. They offer diversification, but potential returns and risks vary based on the fund's asset allocation strategy.

5. What are the main features of a hybrid fund?

Main features include a mix of equity and debt, providing diversification. Hybrid funds offer a balance between growth and stability, catering to different risk profiles. Asset allocation can vary based on fund types.

Hybrid Mutual Funds: Types and Who Should Invest in Them?