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What are Hybrid Mutual Funds & How Does it Work?

What are Hybrid Mutual Funds & How Does it Work?
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If you’re looking for a way to invest your money that balances risk and return, hybrid funds may be a great option for you. In this blog, we will explain what a hybrid fund is, its types, the benefits and the associated risks of investing in it.

Hybrid Fund Meaning

Hybrid funds are types of mutual funds in India that invest in both stocks and bonds, typically in a ratio that reflects the fund’s investment objective. Unlike pure equity funds that invest only in stocks or debt funds that invest only in bonds, a hybrid mutual fund offers a combination of the two. 
The best hybrid mutual funds are designed to provide investors with the benefits of both shares and bonds. Shares may provide the potential for higher returns but can also come with risks.

Additionally, bonds may provide a fixed-income stream and lower risk. The combination of these two asset classes can help manage risk while potentially providing higher returns. They can differ from other types of funds in that they are designed to offer investors a diversified portfolio of both equities and fixed-income securities.

Top 10 Hybrid Mutual Funds

Let’s have a look at the top 10 hybrid mutual funds down below.

Scheme NameExpense Ratio 3-Y Return (Annualized)
ICICI Prudential Equity & Debt Fund1.11%30.42%
ICICI Prudential Multi Asset Fund1%28.81%
HDFC Balanced Advantage Fund0.83%28.51%
Quant Multi Asset Fund0.68%28.08%
Bank of India Mid & Small Cap Equity & Debt Fund1.55%26.93%
Quant Absolute Fund0.75%26.11%
JM Equity Hybrid Fund0.9%23.85%
Franklin India Dynamic Asset Allocation FoF0.4%23.08%
Edelweiss Aggressive Hybrid Fund0.57%22.66%
Mahindra Manulife Aggressive Hybrid Fund0.57%22.28%
Disclaimer: Please note that the above list is for educational purposes only, and is not recommendatory. Please do your own research or consult your financial advisor before investing.

Note: The data on the top hybrid mutual funds in India in the list is from 3rd November, 2023.  However, for real-time updates on stock prices and market trends, visit the smallcase stocks collection today!

How Does a Hybrid Fund Work?

A hybrid fund seeks to achieve a well-balanced investment portfolio that can provide investors with a combination of consistent income and long-term capital growth. The fund manager can construct the portfolio based on the fund’s investment goals, allocating resources to both equities and debt instruments in different ratios. Additionally, the fund manager can adjust the portfolio by purchasing or selling assets in response to favourable market conditions.

Types of Hybrid Funds

There are three main types of hybrid mutual funds: conservative, balanced, and aggressive.

  • Conservative Hybrid Funds: Best conservative hybrid funds can allocate a larger percentage of their portfolio to fixed-income securities such as bonds and cash. They can provide stable returns with low risk. A conservative investor would typically not prefer to invest in high-risk or volatile investments. 
  • Balanced Hybrid Funds: These funds may have a balanced allocation between stocks and bonds, typically ranging from 50-70% in equities and 30-50% in fixed-income securities. They aim to provide a balance between risk and returns and can be suitable for investors with a moderate risk appetite.
  • Aggressive Hybrid Mutual Funds: Aggressive hybrid fund meaning allocating a larger percentage of their portfolio to equities, typically ranging from 70-80%, and a smaller percentage to fixed-income securities. They potentially aim to provide higher returns but can come with higher risk. It can be suitable for investors with a high-risk appetite. These are called equity hybrid funds.
  • Arbitrage Funds: Here, the fund manager can purchase equities at lower prices in one market and can sell them potentially at higher prices in a different market. The fund manager may never stop seeking arbitrage possibilities to increase the returns on the fund.

Factors to Consider When Choosing a Hybrid Fund

Investors should consider their investment goals, risk tolerance, and time horizon when choosing the best hybrid funds. 

  • Risk Tolerance: Investors should consider their risk tolerance when choosing a hybrid fund. Aggressive investors can opt for these with a higher allocation to equities, while conservative investors may prefer funds with a higher allocation to debt.
  • Investment Goals: Investors should consider their investment goals when choosing a hybrid fund. If the goal is long-term wealth creation, investors can opt for equity hybrid funds, while debt-oriented funds may be more suitable for investors looking for regular income.
  • Time Horizon: The investment time horizon is an important factor to consider when choosing a hybrid fund. If an investor has a longer time horizon, they can opt for funds with a higher equity allocation, while a shorter time horizon may require a higher debt allocation.
  • Evaluation of Performance and Expenses: Investors should evaluate a hybrid fund’s performance over a period of time before investing in it. They should also consider the expenses involved, such as management fees, exit load, and other charges.
  • Asset Allocation: Hybrid funds invest in both equity and debt securities in varying proportions. Investors should consider the asset allocation of the hybrid fund they are considering investing in. An equity hybrid fund should have a higher allocation towards equity, while a debt hybrid fund should have a higher allocation towards debt.

How to Find the Best Hybrid Fund?

Hybrid funds, also referred to as asset allocation funds, may enable investors to access multiple asset classes within a single fund. They can come with various risk levels, allowing investors to tailor their investment mix. The fund manager can divide your investment between equity and debt instruments based on predetermined ratios.

The proportion of debt to equity in hybrid funds can be determined by your preferences, risk tolerance, and financial objectives. These funds may provide a balance between risk and return, helping you work toward your financial goals. Thus, a combination of both can also mitigate the adverse effects of a crisis in either the debt or equity market.

The equity portion of your investment can potentially offer long-term gains, while the debt portion may generate regular income through interest payments.

Who Can Invest in Hybrid Funds?

Hybrid funds can be a good option for investors who are looking for a balance between returns and risk. They can be suitable for investors who are looking to potentially generate regular income or grow their wealth. These might be also suitable for investors who have a low to moderate risk tolerance.

Additionally, investors who are new to investing or those who do not have the time or expertise to manage their investments can also consider investing in these funds.  However, it is important to note that investing in these hybrid mutual funds may carry a certain degree of risk. Investors should understand the risks involved and/or consult a financial advisor before making any investment decision.

How to Invest in Hybrid Funds?

Investors can invest in hybrid funds through their brokerage account or directly through the best mutual fund company. 

  • Selecting the Right Fund: Investors can consider their investment goals, risk tolerance, and time horizon when selecting a hybrid fund. They can also seek the help of a financial advisor to select the right fund.
  • Understanding Fees and Expenses: It’s advisable to understand the fees and expenses involved in investing in a hybrid fund, such as management fees, exit load, and other charges.
  • Monitoring Performance: Investors can regularly monitor the performance of their hybrid funds to ensure that they are aligned with their investment goals.
  • Choosing the Best Hybrid Fund: Investors can choose the best hybrid mutual fund based on their investment goals and risk tolerance. They can also compare funds based on their performance and expenses.

Hybrid Fund Taxation

Hybrid funds taxation can be considered like equity funds.

Dividends received might be taxed as per the investor’s income tax slab rate.

In hybrid funds, if kept for a year or more, an investor may only pay long-term capital gains (LTCG) tax of 10%. If it’s a short-term capital gains (STCG), then it maybe a tax of 15% if held for less time. As a result, keeping such funds allows an investor in a high tax band to allocate to fixed income and eventually pay a lesser tax.

Benefits of Investing in Hybrid Funds

These offer several benefits to investors, including diversification, lower risk, and the potential for higher returns. 

  • Diversification: They offer diversification by investing in a mix of stocks and bonds, which helps reduce the risk of loss.
  • Lower Risk: The mix of stocks and bonds in these types of funds can help manage risk and provide stable returns.
  • Potential for Higher Returns: The combination of stocks and bonds in this fund can potentially provide higher returns than fixed-income securities alone.
  • Convenience: Hybrid mutual funds offer a one-stop solution for investors looking to invest in both stocks and bonds.

Risks Associated with Hybrid Funds

Like any investment, a hybrid fund may also come with risks. Some of the risks associated include:

  • Market Volatility: The value of the stocks and bonds in the fund can fluctuate based on market conditions.
  • Interest Rate Changes: Changes in interest rates can impact the value of fixed-income securities in the fund.
  • Credit Risk: Hybrid funds that invest in bonds carry the risk of default by the issuer.

To Wrap It Up…

In conclusion, hybrid mutual funds offer investors a balanced investment option that combines the benefits of both stocks and bonds. By investing in a hybrid fund, investors can potentially achieve higher returns with less risk. To choose the best hybrid mutual fund, investors should consider their investment goals, risk tolerance, and time horizon. 

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1. What is hybrid fund? 

Hybrid funds are funds that invest in a combination of different asset classes, typically a mix of both stocks (equity) and bonds (debt).

2. Which is the best hybrid mutual fund in 2023?

The best hybrid mutual funds list you can buy in India are:

1. ICICI Prudential Equity & Debt Fund
2. ICICI Prudential Multi Asset Fund
3. HDFC Balanced Advantage Fund

Note: This information is provided for educational purposes and is not intended as a recommendation or endorsement.

3.  What is the difference between hybrid fund and balanced fund?

Hybrid funds invest in both equity and debt assets, while balanced funds invest in both equity and debt assets in a relatively equal proportion.

4. What are the hybrid mutual funds returns in India? 

It is important to note that past performance is not a guarantee for hybrid funds returns. Hybrid funds are also subject to market risks, so please do your own research and/or consult a financial advisor before investing.

5. What is an example of a hybrid mutual fund?

A hybrid mutual fund invests in both stocks and bonds, providing a balance of growth potential and income. An example is the Vanguard Balanced Index Fund (VBAIX).

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