The term hybrid in case of mutual funds means a fund that invests in a mix of different asset classes. Hybrid funds invest across equity, debt and gold in a certain proportion based on the scheme’s investment objective. Investing in different asset classes helps in diversification and offers better risk adjusted returns. Hybrid funds are classified into different categories based on the percentage of allocation into different asset classes. As per SEBI guidelines, there are seven different types of mutual funds that investors can choose from based on their risk appetite and investment horizon. Below are the details of different hybrid funds:
- Conservative Hybrid Funds – Equity allocation is between 10-25% and debt allocation is between 75-90%
- Balanced Hybrid Funds – Both Equity and debt allocation can be between 40-60%
- Aggressive Hybrid Funds – Equity allocation is between 65-80% and debt allocation is between 20-35%
- Dynamic Asset Allocation Fund/Balanced Advantage Funds – Fund manager can invest in equity and debt in a dynamic way based in his/her assessment of market conditions
- Multi Asset Allocation Funds – These funds invest in at least three asset classes with a minimum of 10% in each asset class
- Arbitrage Funds – These funds capture the arbitrage opportunities available in the market and invest minimum of 65% in equities
- Equity Savings Funds – These funds invest minimum of 65% in equity and minimum 10% in debt. These funds can also take hedged & unhedged calls
Investments in hybrid mutual fund can be a starting point for a new investor as it gives the benefit of diversification within a single fund. Hybrid funds having higher allocation to equity are better suited for investors who are looking for capital appreciation in the long-term with a bit of stability to provide a cushion against equity market volatility.
On the other hand, conservative investors having low risk appetite should consider investing in hybrid funds that have higher allocation to debt. Conservative hybrid funds invest a major portion of their assets in debt instruments and a small portion in equity or equity related instruments thus providing stable returns with the opportunity of capital appreciation. Multi asset allocation funds enable investors to invest in multiple asset classes through investments in a single scheme. These funds invest in at least three asset classes with a minimum 10% in each asset class. The fund manager of the scheme adjusts the allocation to each asset class based on the prevailing market view.
Given the current market scenario, it can be difficult for investors to decide on an asset class to invest in. In such times, hybrid funds can help investors get exposure to different asset classes, based on their risk appetite to balance the overall risk taken.
Rules of investing in a hybrid fund are the same as for any investment. The most important rules are mapping one’s goals, risk appetite, and time horizon to help select funds that are best suited to the investor.
When it comes to investing in hybrid funds, the procedure of investment remains the same as for any other mutual fund scheme, which starts with creation of a folio with a fund house. To start with, the investor needs to be KYC (Know Your Customer) compliant. Once these steps are done, an investor can select the scheme and the mode of investment i.e. SIP (Systematic Investment Plan) or lumpsum. If one opts for the SIP facility, the amount will be auto debited from the bank account that was linked to the folio during the time of its creation.
Hybrid funds should form an important part of an investors overall portfolio and investors need to be aware that these funds can also be volatile in the short run. However, they aim to provide better risk adjusted returns over the long-term. Investors should also be aware about the taxation aspects of these funds. As these funds change the allocation to each asset class within the investment limit, the tax implication on some of the hybrid funds change from time to time. Investors are recommended to consult a tax advisor to better understand the taxation aspect of these funds.