Hybrid mutual funds are those that invest in a mix of equity and debt. Depending on the proportion of money invested in equity and debt, there are different types of hybrid mutual funds in India. Hybrid mutual funds are the favorite choice of investors who are beginning to take on equity exposure. This is because the debt portion acts as a cushion in times of volatility in the market.
Therefore, deciding which one to choose and when to invest in a hybrid mutual fund is dependent on your risk appetite and financial goals. The ideal duration of investing in hybrid funds is 3 years. So if you have a financial goal which is at least 3 years away and you are willing to take on equity exposure, you may want to consider investing in these funds.
Let us have a look at the different types of hybrid mutual funds in India.
1. Conservative Hybrid Funds
- Investment in equity would be 10%-25% of total assets
- Investment in debt would be 75%-90% of total assets
- As is evident, this type of hybrid fund invests predominantly in debt instruments
- This is good for an extremely conservative investor who is willing to take on a maximum of 25% equity exposure
- These funds are taxed as per norms for debt funds, which means the holding period for profits to be considered as long term capital gain would be 3 years.
2. Aggressive Hybrid Funds
- Investment in equity would be 65%-80% of total assets
- Investment in debt would be 20%-35% of total assets
- As is evident, this type of hybrid fund invests predominantly in equity instruments
- This is good for an aggressive investor who is willing to take on a maximum of 80% equity exposure while also keeping a minimum of 20% in debt instruments
- These funds are taxed as per norms for equity funds, which means the holding period for profits to be considered as long term capital gain would be 1 year
3. Balanced Advantage or Dynamic Asset Allocation funds
- Investment in equity and debt is allocated dynamically by the fund manager depending on the market situation
- The funds have internal guidelines based on market indicators which help them to decide the asset allocation
- These funds are eligible to be taxed as equity funds because of a minimum investment of 65% in equity
- However, they would use equity arbitrage instruments or derivatives to bring the net equity exposure down to 40% or even 25% in some funds
- These funds are good for investors who are willing to let the fund manager decide their asset allocation depending on the market situation rather than going for a fixed equity or debt allocation.
4. Multi-Allocation Funds
- In multi-allocation funds, they invest the amounts in at least 3 different asset classes. Usually, equity and debt are the popular ones and the third asset class could be gold or real estate
- The minimum allocation to each of these asset classes would be 10%
- So if you are an investor who would like to have additional exposure to a different asset class, these type of hybrid funds could help you
5. Arbitrage Funds
- Investment in equity and related instruments would be at least 65% of total assets
- They are permitted to take advantage of arbitrage opportunities which means they generate returns out of trading opportunities in cash and derivative market
- They are essentially low risk equity funds because all of their equity exposure is hedged
6. Equity Savings Funds
- These type of hybrid funds invest in equity, arbitrage and debt
- They have to maintain a minimum equity investment of 65% and a minimum debt investment of 10%
- Taking advantage of arbitrage, the net equity exposure is contained to 25%-35% of the funds
- The hedged portion and non-hedged portion of the investment is declared beforehand.
- The taxation is done as per the norms for equity funds
- Equity savings funds are good for conservative investors who are looking for better returns than short term debt funds or fixed deposits
The best part about hybrid mutual funds is that they bring diversification within a single mutual fund scheme. Therefore, it is easy and relatively safe option for beginners in the stock market or those who are conservative risk takers.