What is Hybrid Mutual Funds, Best Hybrid Funds & Benefits

Hybrid Mutual Funds is a type of mutual fund that invest in more than one asset class. It contains a mixture equities and debt instruments and does not specifically invest in one asset class, in order to maximize the returns using equities and have low risk by having some debt instruments. Hybrid Mutual Funds are best for conservative investors who want to take low risk and also want better returns than debt mutual funds.

Let us understand Hybrid Mutual Funds in more detail.

Table of Contents

What is Hybrid Mutual Funds?
How Hybrid Mutual Funds works?
Types of Hybrid Mutual Funds
Benefits of Hybrid Mutual Funds
Best Hybrid Mutual Funds to invest in
Mutual Fund Returns Calculation Video
Conclusion
Frequently Asked Questions

What is Hybrid Mutual Funds?

Hybrid Mutual Funds is one of the types of Mutual Funds that invest in equities as well as debt instruments, and hence helps us in diversification – investing in various asset classes
Unlike Equity Mutual Funds that only invest in equities and Debt Mutual Funds that only invest in debt instruments, Hybrid Mutual Funds provides advantages of both – high returns compared to debt funds and low risk compared to equity funds
There are various types of Hybrid Mutual Funds based on the asset allocation that we will discuss below
You can get anywhere between 8% to 12% annual average returns in these funds. Can get more returns based on the equity exposure in these funds
These funds are best suited for you if you are a conservative investor and want to invest for better returns compared to debt funds and low risk compared to equity funds

Let us now see how Hybrid Mutual Funds work

How Hybrid Mutual Funds works?

All Hybrid Mutual Funds are allocated with fund manager who are responsible to buy or sell stocks in portfolio
The main goal of these fund manager is to maximize the returns on the money provided by you as an investor
Hybrid Mutual Funds manager will allocate in a mix of equity and debt instruments asset classes in order to achieve required returns from the market and be less risky at the same time
Based on their studies, the fund managers will allocate more amount to equity portion when market is moving up and more amount to debt instruments when they see that market is going to come down
This will help to make maximum gain with equities during the bull market and avoid huge losses during bear market
The allocation to equity and debt instruments define the type of Hybrid Mutual Funds that you are invested in

Let us now understand the various types of Hybrid Mutual Funds.

Types of Hybrid Mutual Funds

There are various types of Hybrid Mutual Funds in India classified as below:

Multi Asset Allocation Fund

Multi Asset Allocation Fund is a type of Hybrid fund that need to have investments in at least 3 asset classes. These can include equities, debt, real estate, gold, etc. All asset classes must have at least 10% of investment out of total assets available with this hybrid fund, that is why it is given the name Multi Asset Allocation Fund, due to the multiple asset classes available.

Aggressive Hybrid Fund

Aggressive Hybrid Fund is a type of Hybrid Fund that needs to have equity allocation between 65% to 80%, and the remaining allocation of 20% to 35% in debt instruments. Due to their high allocation to equity, they are known as Aggressive fund and tries to get maximum returns from equity allocation, at the same time provide some low risk due to debt allocation. The allocations of equities can change between 65% to 80% based on the market conditions.

Conservative Hybrid Fund

Conservative Hybrid fund is a type of Hybrid fund that allocates between 10% to 25% in equity and equity related instruments. Unlike Aggressive hybrid funds where allocation to equity is more, in conservative hybrid fund, exposure to debt instruments is more that is why they are called conservative mutual funds. These funds aim to protect your capital invested due to major exposure to debt instruments, while getting some extra returns with equity exposure compared to debt fund and money market mutual funds.

Equity Savings Fund

Equity Savings Fund is a type of Hybrid mutual fund that have equity allocation between 65% to 100% and the remaining 0% to 35% in debt instruments. These funds balance the returns and risk by investing in equity, debt and derivatives. Derivatives are used to reduce volatility and funds and generate stable returns. These funds are more risky compared to conservative hybrid fund discussed above.

Dynamic Asset Allocation or Balanced Advantage Fund

Dynamic Asset Allocation or Balanced Advantage Fund is a type of Hybrid fund that can allocate 100% to equity or 100% to debt instruments based on the market conditions and strategy applied by the fund. That is why they are truly dynamic in nature. These funds are recommended to those who want to automate their asset allocation between equity and debt and want to leave this decision up to fund manager who have more experience than self.

Arbitrage Fund

Arbitrage Fund is a type of hybrid fund that invest between 65% to 100% in equities and 0% to 35% in debt instruments. These funds simultaneous buy and sell in different markets and make profits due to the difference in prices. Arbitrage Funds are best suited for conservative investors who want decent returns with low risk on investment. Since they buy and sell continuously, they are not selecting particular equities for long term investing, thus reducing the risk, while at the same time making debt like returns.

So these are some of the types of Hybrid Mutual funds in India. They are mainly categorized based on the asset allocation between equity, debt and other assets.

Benefits of Hybrid Mutual Funds

Let us now see various Benefits of investing in Hybrid Mutual Funds:

Multiple Asset Classes: Hybrid funds helps us to invest in multiple asset classes with just one fund thus helping us to diversify the investments. This reduces the risk of losing the capital while investing in just one asset class. Multiple assets help to average out the returns from all asset classes
Active Risk Management: Based on the market conditions, the allocation to equity and debt is updated regularly in hybrid mutual funds thus helping in risk management
Diversification: Since Hybrid funds allocate assets to equities, debt, real estate, etc. based on the type of hybrid fund selected, we are diversifying the investments, which means not putting all eggs in one basket. This is very important while investing in financial market to avoid losses due to a single asset class
Automatic Rebalancing: The allocation to equity and debt instruments happen automatically based on the market conditions and other factors. In this way, we need not have to worry about switching between different asset classes from our side to be on safe side

ALSO READ: Rs. 5000 SIP in Sensex for 25 Years [VIDEO]

Best Hybrid Mutual Funds to invest in

Below are some of the best Hybrid Mutual funds that have given good returns with low risk in past. These are not recommendations and you should take financial advice from appropriate advisor before investing.

ICICI Prudential Equity & Debt Fund
HDFC Balanced Advantage Fund
ICICI Prudential Multi Asset Fund
Quant Multi Asset Fund
Bank of India Mid & Small Cap Equity & Debt Fund

Check out the ET Money Article on Best Hybrid funds to know more.

Mutual Fund Returns Calculation Video

Below is the video on mutual fund returns calculation when you invest Rs. 1000 per month in a mutual fund:

Watch more Videos on YouTube Channel

Conclusion

So Hybrid Mutual Funds help us to diversify the investments based on the asset allocations between equity, debt and other financial assets. These funds are best suited for conservative investors who want to enjoy good returns with low risk.

Hybrid mutual funds fall in between equity mutual funds and debt mutual funds in terms of returns and risk taken. Types of Hybrid mutual funds are classified based on the allocation of total assets to different categories of assets discussed above.

Some more reading:

Frequently Asked Questions

What are hybrid funds?

Hybrid funds are on of the types of mutual funds that invest in mix of equities and debt instruments. They help us diversify our investments in various asset classes, and that’s why the name – Hybrid Mutual Funds. Based on the asset allocation percentage, they can be classified as multi asset hybrid fund, aggressive hybrid fund, conservative hybrid fund, etc.

Which is better hybrid or equity fund?

If you can take risk than equity fund can give you better returns. But if you are a conservative investor, hybrid fund gives you the opportunity to diversify your investments between equities and debt instruments, thus lowering your risk to some extent and providing decent returns at the same time. So you can go for hybrid fund if you are a conservative investor. It is important to note that all mutual funds are subjected to market risk, and past performance does not guarantee future returns.

Are hybrid funds safe?

All mutual funds are subjected to market risk and have an associated risk attached with them. Hybrid funds can be considered safer compared to equity mutual funds, but is not 100% safe since nobody can predict future market conditions. Allocation to debt instruments in hybrid funds provide some cushion of safety.

Is hybrid and balanced funds same?

Yes balanced fund is one of the types of hybrid fund that balances the allocation between equity and debt instruments. Some hybrid funds may ben towards equity or debt based on it’s type and market conditions to maximize your returns, while at the same time having low risk on your investments.

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