A hybrid fund is a type of mutual fund which invests in more than one asset class. It can be a combination of equity and debt, equity and gold, real estate or it can be a mix of three. Each hybrid mutual fund scheme has a different investment objective based on which the asset allocation and proportion are set.

Who should look to invest in hybrid funds:

First time investors who want to start their investment journey in mutual fund.

Hybrid funds are considered to be riskier than debt funds but safer than equity funds. They tend to offer better returns than debt funds and are preferred by many low-risk investors.

Investors looking to reduce risk through diversification across asset classes can benefit from hybrid funds.
Those seeking a balance between growth potential and income can achieve this balance through hybrid funds.

Hybrid funds allow investors to make the most out of equity investments while cushioning themselves against extreme volatility in the market.

Types of Hybrid Funds:

1. Conservative Hybrid Fund: Conservative hybrid funds typically allocate 10% to 25% to equity and equity-related instruments, while the remaining 75% to 90% is invested in debt instruments.

2. Balanced Hybrid Fund (no arbitrage): Balanced Hybrid Funds aim to maintain a balance by investing between 40% to 60% in both equity and debt instruments.

2. Aggressive Hybrid Fund: Aggressive hybrid funds have a higher equity exposure, with 65% to 80% in equities and 20% to 35% in debt instruments.

3. Dynamic Asset Allocation or Balanced Advantage: Balanced advantage funds have the flexibility to allocate anywhere from 0% to 100% in equity and debt, allowing them to adapt to market conditions.

4. Multi Asset Allocation: Multi Asset Allocation Funds invest in at least three or more asset classes, such as equity, debt, gold, etc., with a minimum allocation of 10% to each.

5. Equity Savings: Equity savings funds have a minimum of 65% allocated to equity and a minimum of 10% in debt instruments.

6. Arbitrage Funds: Arbitrage funds are equity-oriented hybrid funds that seek to generate returns by leveraging the price differential between cash and derivative market.

 

Taxation Rules of Hybrid Mutual Funds

In hybrid funds, the tax on gains is as follows:

Equity Component of the Hybrid Fund (where more than 65% of the portfolio is in equity)

This is taxed like equity funds:

    • Long-Term Capital Gains – More than Rs. 1.25 lakh is taxed at 10% without indexation.
    • Short Term Capital Gains – they are all taxed at 15%.

Debt Component of the Hybrid Fund (where more than 65% of the portfolio is in debt)

  • This is taxed like any pure debt fund. The capital gains are added to your income and taxed as per the applicable income tax slab.