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Hybrid Funds

Hybrid funds are mutual funds that invest in both equity and debt instruments. It gives investors the opportunity to diversify their portfolio through a single investment vehicle. The ratio of stocks and bonds can remain fixed or may vary equivalently over time. The main intent behind these funds is to give investors the best of both worlds - equity and debt.

Hybrid funds have a stated objective, such as conservative, moderate or aggressive. The fund manager will allocate investors’ money in varying proportions in equity and debt as per the fund’s investment objective. Hybrid funds are generally regarded as a good option for individuals seeking low risk investment with average capital appreciation and stable returns. Given that such funds have a cushion of debt, they perform well during the moments when stock markets are going through a difficult phase. Thus, it can be said that hybrid funds are better equipped to withstand the shocks when the market is not performing too well.

Types of Hybrid Funds

Following are the different types of hybrid funds:

Balanced Funds

Balanced funds are one of the most popular kind of hybrid funds. Here, at least 65% of an investor's portfolio constitutes of investments in equity and equity-oriented instruments. For the purpose of calculating taxes, balanced funds are treated similar to equity funds. This means that if the holding period is more than 1 year, a 10% tax is applicable when the gains are over Rs. 1 lakh. Balanced funds are a suitable option for conservative investors who want to take advantage of the return-earning capacity of equities without the increased risk.

Monthly Income Plans

In monthly income plans, investments are primarily made in debt instruments. Such funds generally have 15-20% exposure to equities, and the remaining in debt. Investors holding such plans stand to gain higher returns when compared with debt funds. Monthly income plans provide regular income in the form of dividends. They sometimes also provide the growth option, where dividend is not paid out, rather the investments grow in the fund’s corpus. Thus, such plans should not be treated as just a monthly income investment.

Arbitrage Funds

Arbitrage funds are a kind of equity mutual fund which takes advantage of the mispricing in the price of a stock between the derivatives and futures market. The fund manager simultaneously purchases shares in the cash market and sells it in futures or derivatives market. The difference in the cost price and selling price is the return you earn. It must however, be noted that arbitrage opportunities are not available easily. Should it be absent, these funds might stay invested in debt instruments or cash. Arbitrage funds are considered relatively safer funds.

Asset Allocation Fund

Asset allocation funds are those that invest in a varied class of assets, such as domestic and foreign bonds and stocks, gold bullion, government securities and real estate stocks. While some schemes keep the proportions allotted among sectors constant, others keep revising the mix as per the market conditions.

Debt-Oriented Fund

Debt oriented hybrid funds are those which predominantly invest in debt with a moderate exposure to equity. Equity exposure can vary from 5% to 30% of portfolio as per the funds’ asset allocation pattern. The portfolio’s debt component seeks to provide stability, while the equity portion act as a kicker to enhance overall returns. Debt-oriented hybrid funds are best-suited for investors who have a moderate risk profile and whose investment horizon is at least a year.

How do Hybrid Funds work?

The intent of hybrid funds is to attain wealth appreciation in the long-run and generate income in the short-run through a balanced portfolio. The investor’s money is allocated by the fund manager in varying proportions in equity and debt as per the fund’s investment objective.Hybrid funds can be debt-oriented or equity-oriented.

An equity-oriented fund is where the fund manager puts in 65% or more of the fund’s assets into equity instruments and the remaining in debt and money market instruments. A debt-oriented fund is where 60% of the fund’s assets are invested in debt instruments and the remaining in equity. To ensure liquidity, a part of the fund would also be put into in cash and cash equivalents.

The fund’s equity component constitutes of equity shares of firms across industries such as real estate, FMCG, finance, healthcare, automobile, etc. The debt component of the fund comprises of investments in fixed-income instruments, such as government securities, bonds, debentures, treasury bills, etc. The fund manager may buy or sell securities to take advantage of market movements.

Who should Invest in Hybrid Funds?

Hybrid funds are considered as a safer option than pure equity funds. They fetch higher returns when compared with pure debt funds and are a preferred choice for many conservative investors. First-time investors who want to participate in the equity markets can do so through hybrid funds. Given that they are a combination of equity and debt, the equity portion helps to take advantage of the equity wave.

The fund's debt component provides certain level of protection against extreme market fluctuations. This helps the investor earn stable returns rather than facing a total burnout, which is a possibility with pure equity funds. For the less conservative investors, the dynamic asset allocation feature of hybrid funds is the best option to make the most out of market fluctuations.

Things an Investor should consider

Here are the essential points every investor interested in hybrid funds should consider before investing: Risk

It would be wrong to assume that there are no risks associated with investing in hybrid funds. Such funds are exposed to market risks, however, the level of risk one has to take is comparatively lower as against equity funds. Investors therefore need to exercise caution while investing in hybrid funds. The following statement by SEBI holds true concerning investments in hybrid funds, “Mutual fund investments are subject to market risk, please read the offer document carefully before investing.”

Return

The returns under hybrid funds are not guaranteed. The money that an investor puts into a hybrid fund is invested by fund managers in line with the objective of the scheme, and the performance of these investments impact the returns generated. There can be instances where dividends may not be declared on account of market downturns.

Investment Horizon

They are suited for investors who have a moderate risk appetite and wish to stay invested for a medium-term, say around three to five years. The longer an individual chooses to stay invested, the better chances he or she has of fetching high returns on investment.

Cost

Hybrid funds charge a fee, known as the expense ratio, for managing the investors' money. It is essential to enquire about how much this amount is before investing and preferably go for those with a low expense ratio as this would translate to higher take-home returns for the individual.

Financial Goals

Hybrid funds can be used to meet intermediate and near-term financial goals such as buying a car or planning a foreign holiday, to name a few. Those who are retired, can opt for the dividend option to supplement their post-retirement income.

Tax on Gains

The fund’s equity component is taxed like equity funds, while the debt component is taxed as debt funds. Long-term capital gains exceeding Rs. 1 lakh on equity component are taxed at the rate of 10%, while short-term capital gains are taxed at the rate of 15%. Short-term capital gains in debt-oriented funds are taxed as per the investor's tax slab, while long-term capital gains are taxed at the rate of 20% after indexation.

How to Invest in Hybrid Funds

Follow the below steps to invest in a hybrid fund:

Step 1: Get in touch with a representative of the fund house or an empanelled distributor.
Step 2: Procure application/KYC form. Provide necessary information i.e. name, address, email ID, mobile number, etc. The contact details mentioned will be used for further communication, and can also be used to register for online transaction services.
Step 3: Attach copies of necessary documents and hand them over along with a cheque or DD of the desired investment amount.
Step 4: The fund housewill then allocate and provide a folio number for that particular investment. Once the transaction is processed, the investor will receive an Account Statement.

The above-mentioned steps relate to the offline method of investing in hybrid funds. Most fund houses have set up online portals where potential investors can buy a scheme, simply through the click of their mouse.

Top 10 Hybrid Funds in India

Scheme Name	1-Year Return (%)	3-Year Return (%)	5-Year Return (%)
Principal Hybrid Equity Fund (G)	12.5	14.5	19.9
Aditya Birla Sun Life Equity Hybrid 95 Fund Growth	5.9	10.2	19.2
SBI Equity Hybrid Fund Growth	11.5	10.1	19.3
DSP BlackRock Equity and Bond Fund Growth	9.3	11.7	19.1
Reliance Equity Hybrid Fund Growth	7.2	10.9	20.0
ICICI Prudential Equity & Debt Fund	8.2	11.5	20.0
L & T Hybrid Equity Fund	7.4	10.0	20.1
UTI Hybrid Equity Fund	7.6	9.9	16.7
Canara Robeco Equity Debt Allocation Fund	10.5	10.3	19.3
Franklin India Equity Hybrid Fund	8.1	8.7	18.8

About the schemes:

Principal Hybrid Equity Fund (G)

Fund House	Principal Mutual Fund
Scheme Type	Open-ended
Objective	To generate long-term capital appreciation and current income from a balanced portfolio
Fund Size (Cr.)	Rs. 1280.74

Aditya Birla Sun Life Equity Hybrid 95 Fund Growth

Fund House	Birla Sun Life Mutual Fund
Scheme Type	Open-ended
Objective	To generate long-term capital appreciation and income generation.
Fund Size (Cr.)	Rs. 14497.05

SBI Equity Hybrid Fund Growth

Fund House	SBI Mutual Fund
Scheme Type	Open-ended
Objective	To provide investors long-term capital appreciation along with liquidity.
Fund Size (Cr.)	Rs. 23833.58

DSP BlackRock Equity and Bond Fund Growth

Fund House	DSP Mutual Fund
Scheme Type	Open-ended
Objective	To generate long-term capital appreciation and current income from a portfolio comprising of equities and fixed income securities.
Fund Size (Cr.)	Rs. 7085.58

Reliance Equity Hybrid Fund Growth

Fund House	Reliance Mutual Fund
Scheme Type	Open-ended
Objective	To fetch consistent returns by investing a greater portion in equity and a small portion in debt and money market instruments.
Fund Size (Cr.)	Rs. 13368.18

ICICI Prudential Equity & Debt Fund

Fund House	ICICI Prudential Mutual Fund
Scheme Type	Open-ended
Objective	To fetch long-term capital appreciation and current income by investing in a portfolio consisting of equities and fixed income and money market securities.
Fund Size (Cr.)	Rs. 28510.22

L & T Hybrid Equity Fund

Fund House	L & T Mutual Fund
Scheme Type	Open-ended
Objective	To generate long-term capital appreciation from a diversified portfolio constituting of primarily equity and equity related securities.
Fund Size (Cr.)	Rs. 10483.16

UTI Hybrid Equity Fund

Fund House	UTI Mutual Fund
Scheme Type	Open-ended
Objective	To generate long term capital appreciation by investing primarily in equity and equity related securities of firms across the market capitalization spectrum.
Fund Size (Cr.)	Rs. 6118.12

Canara Robeco Equity Debt Allocation Fund

Fund House	Canara Robeco Mutual Fund
Scheme Type	Open-ended
Objective	To build a balanced portfolio to provide a combination of high annual return and capital appreciation.
Fund Size (Cr.)	Rs. 1601.55

Franklin India Equity Hybrid Fund

Fund House	Franklin Templeton Mutual Fund
Scheme Type	Open-ended
Objective	To achieve long-term capital appreciation and current income from a balanced portfolio comprising of high quality equity and fixed-income securities.
Fund Size (Cr.)	Rs. 2067.14

FAQs on Hybrid Funds

What do you mean by hybrid fund?

What are debt-oriented hybrid funds?

Debt oriented hybrid funds are those which predominantly invest in debt with a moderate exposure to equity. Equity exposure can vary from 5% to 30% of portfolio as per the funds’ asset allocation pattern. The portfolio’s debt component seeks to provide stability, while the equity portion act as a kicker to boost overall returns. Debt-oriented hybrid funds are best-suited for investors who have a moderate risk profile and whose investment horizon is at least 1 year.

Are hybrid funds taxable?

Yes. The fund’s equity component is taxed like equity funds, while the debt component is taxed as debt funds. Long-term capital gains exceeding Rs. 1 lakh on equity component are taxed at the rate of 10%, while short-term capital gains are taxed at the rate of 15%. Short-term capital gains in debt-oriented funds are taxed as per the investor's tax slab, while long-term capital gains are taxed at the rate of 20% after indexation.

Can you withdraw money from a mutual fund without penalty?

Some mutual fund schemes charge an exit load, depending on when an investor wishes to withdraw money. This is generally part of equity-oriented funds to encourage investors to remain invested for the long term.

What is hybrid equity fund?

Equity-oriented hybrid schemes are those where at least 65% of the corpus is invested in equity. These schemes tend to be less volatile when compared with pure equity funds on account of their mixed portfolio.

What do you mean by Multi-cap Fund?

Multi-cap funds are diversified mutual funds that invest across large cap, mid-cap and small-cap stocks. The fund manager will vary the asset allocation across market capitalization.

What is a balanced mutual fund?

Balanced funds are those where the fund managers usually invest 50% to 70% of portfolio into stocks and the remainder in bonds and other debt instruments. Such funds are usually equity-oriented hybrid funds.

What is an equity mutual fund?

Equity mutual fund are those where an investor’s money is predominantly invested in stocks with the aim to generate high returns. Such funds can be actively or passively managed.

What is the debt fund?

A debt fund is an investment pool where the core holdings constitute of fixed income investments. Debt securities tend to pay a fixed rate of interest and have a fixed maturity date.

Can you withdraw money from a mutual fund?

Yes, however, exit loads may apply depending on when the investor decides to withdraw the money.

Are mutual funds liquid?

For open-ended funds, investors can place redemption request any day. After the request is made, an investor can get his or her money back anywhere from 1 to 5 working days.

What is a money fund redemption?

All mutual fund shares are 'redeemable', which means that an investor can sell his or her shares back to the fund. The fund prospectus usually lists down the specifics about redemption of fund shares, including the redemption costs that will be levied for exiting the fund.

What is a liquid mutual fund?

Liquid funds are debt mutual funds where money is invested in very short-term market instruments like treasury bills, government securities and call money. They are designed to provide liquidity with a high probability for capital protection.

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