What is Hybrid Mutual Fund? -Types, Benefits, and Investment Strategy

When investing in mutual funds, you typically aim to find the right balance between risk and return. This is where hybrid mutual funds come into play. A hybrid mutual fund combines two or more asset classes, usually equity and debt, within a single portfolio. The key purpose of this blend is to offer a more diversified investment, spreading risk across various types of assets, thereby catering to investors who are looking for both growth and stability.

Hybrid funds have gained significant traction in the Indian share market as they provide investors with an option to earn returns from equity exposure while safeguarding their investments through debt components. Whether you’re a new investor or an experienced one looking to balance your portfolio, understanding the workings of hybrid mutual funds is essential for better financial planning.

In this blog, we’ll explore the meaning, types, benefits, and strategies of hybrid mutual funds in the Indian share market.

What is a Hybrid Mutual Fund?

A hybrid mutual fund is a type of mutual fund scheme that invests in a mix of equity and debt instruments. The primary goal is to create a balanced portfolio that captures the growth potential of equities while reducing the risk exposure through debt investments. These funds are designed to cater to investors with varying risk appetites, offering a balance between capital appreciation and income generation.

Equity portion in hybrid funds typically consists of shares of companies that provide growth potential, whereas the debt portion consists of fixed-income instruments like bonds, debentures, and government securities that provide stability.

Key Features of Hybrid Mutual Funds

1. Diversification

Hybrid funds invest in both equity and debt, offering diversification within a single fund. This helps reduce risk since the performance of different asset classes often varies under different market conditions.

2. Balanced Risk

By investing in both equities and fixed-income instruments, hybrid funds strike a balance between growth and stability, making them suitable for investors with moderate risk tolerance.

3. Flexible Allocation

Hybrid funds offer flexibility in asset allocation. Some funds may have a fixed proportion of equity and debt, while others can adjust their allocation based on market conditions.

4. Income and Capital Growth

Hybrid funds generate income through debt instruments while offering the potential for capital appreciation from equity investments.

Types of Hybrid Mutual Funds

Hybrid mutual funds come in different types, each offering a distinct balance between equity and debt. Here are the main types of hybrid funds available in the Indian share market:

1. Balanced Hybrid Funds

Balanced hybrid funds invest in a nearly equal mix of equity and debt. The typical allocation ranges between 40-60% in equity and 40-60% in debt. These funds aim to provide moderate growth with relatively low risk compared to pure equity funds.

Example: If a balanced hybrid fund allocates 50% to equity and 50% to debt, it offers both growth potential and stability. This makes it an ideal choice for risk-averse investors who seek balanced returns.

Table 1: Example of Balanced Hybrid Fund Allocation

Asset Class	Allocation (%)
Equity	50%
Debt	50%

2. Aggressive Hybrid Funds

Aggressive hybrid funds invest a larger portion (65-80%) of their assets in equities and the remaining 20-35% in debt instruments. These funds are suited for investors with a higher risk tolerance, as the greater exposure to equities means higher potential returns, but also higher risk.

Example: An aggressive hybrid fund may allocate 75% to equities and 25% to debt. This makes it more suitable for investors seeking capital growth but still looking for some level of protection through debt.

Table 2: Example of Aggressive Hybrid Fund Allocation

Asset Class	Allocation (%)
Equity	75%
Debt	25%

3. Conservative Hybrid Funds

Conservative hybrid funds prioritize safety and income generation by investing a larger portion in debt instruments (around 75-90%) and a smaller portion in equities (10-25%). These funds are suitable for conservative investors looking for income with minimal risk.

Example: A conservative hybrid fund that allocates 80% to debt and 20% to equity would appeal to retirees or individuals with a low-risk tolerance, as the focus is on capital preservation and steady returns.

Table 3: Example of Conservative Hybrid Fund Allocation

Asset Class	Allocation (%)
Debt	80%
Equity	20%

4. Arbitrage Funds

Arbitrage funds use arbitrage opportunities between the cash and futures markets to generate returns. They primarily invest in equities but hedge their positions by simultaneously selling futures contracts, which mitigates risk. Arbitrage funds are considered low-risk and offer tax advantages similar to equity mutual funds.

Example: An arbitrage fund might invest 70% in equities and hedge it by shorting the same stocks in the futures market. The remaining 30% might be invested in debt instruments for stability.

5. Dynamic Asset Allocation Funds

Also known as Balanced Advantage Funds, dynamic asset allocation funds have the flexibility to switch between equity and debt depending on market conditions. These funds adjust their allocation dynamically, aiming to maximize returns while reducing risk during market volatility.

Example: During a bull market, a dynamic asset allocation fund might increase equity exposure to 80%, while during a bear market, it may reduce it to 30% and increase debt holdings.

Why Should You Invest in Hybrid Mutual Funds?

Hybrid mutual funds are a popular investment choice for several reasons:

1. Diversification

Investing in both equity and debt instruments provides diversification, which can help reduce risk. The performance of different asset classes varies depending on market conditions, and hybrid funds can spread out risk while maintaining growth potential.

2. Balanced Returns

Hybrid funds strike a balance between risk and return. Equity investments provide capital appreciation, while debt investments offer stability and regular income. This makes hybrid funds a suitable option for moderate risk-takers who want a blend of growth and security.

3. Ideal for New Investors

For those who are new to investing, hybrid funds provide an entry point into both equity and debt markets without the need to select individual securities. New investors benefit from professional management and a diversified portfolio in one fund.

4. Better Risk Management

Hybrid funds allow fund managers to dynamically adjust the allocation between equity and debt based on market conditions. This flexibility ensures better risk management, particularly during volatile periods.

Table 4: Performance of Hybrid Funds in the Last 5 Years (2020-2023)

Fund Name	2020 Return (%)	2021 Return (%)	2022 Return (%)	2023 Return (%)
SBI Hybrid Fund	8.5	12.3	10.1	11.7
HDFC Balanced Advantage Fund	7.8	13.0	9.6	10.5
ICICI Prudential Equity & Debt Fund	9.1	14.2	11.0	12.3

Historical Data: Growth of Hybrid Mutual Funds in India

Over the past decade, hybrid mutual funds have become increasingly popular in India. The growth of hybrid funds has been fueled by both the rising interest in equity investments and the need for safer alternatives during volatile market conditions.

Table 5: Growth of Hybrid Mutual Funds in India (2015-2023)

Year	AUM (INR Trillions)	Number of Funds
2015	2.2	25
2017	3.5	35
2019	5.1	45
2021	6.8	50
2023	8.5	55

Taxation on Hybrid Mutual Funds

The taxation of hybrid mutual funds in India depends on their equity-debt composition:

Equity-Oriented Hybrid Funds: Funds with an equity allocation of 65% or more are taxed like equity funds. If units are sold after 1 year, the gains are taxed as long-term capital gains (LTCG) at 10% (without indexation) on gains exceeding ₹1 lakh. Gains from units sold within 1 year are taxed as short-term capital gains (STCG) at 15%.
Debt-Oriented Hybrid Funds: Funds with a debt allocation greater than 65% are taxed like debt funds. Gains from units sold after 3 years are taxed as LTCG at 20% with indexation, while gains from units sold within 3 years are taxed as STCG, which is added to the investor’s income and taxed according to the applicable tax slab.

Conclusion

A hybrid mutual fund is an excellent investment choice for those seeking a diversified, balanced portfolio that offers both growth and stability. By combining equity and debt instruments, hybrid funds provide a more flexible approach to managing risk and generating returns. Whether you’re a conservative investor looking for stability or an aggressive investor seeking capital appreciation, there is a hybrid mutual fund suited to your financial goals.

Investing in hybrid mutual funds offers a balanced approach to long-term financial growth, making them an ideal choice for Indian investors who want the best of both worlds—equity growth and debt security. Understanding the different types of hybrid funds and their unique features can help you make informed decisions for your investment portfolio.