Hybrid Mutual Funds

Investments can be broadly classified into three types based on risk – equity (or high-risk) investments, debt (or low-risk) investments, and hybrid investments. Most investment advisors ask investors to create an investment plan based on their financial goals, risk tolerance, and investment horizon. Every individual has different needs and aspirations and hence it is difficult to classify an investor as a purely high-risk or low-risk-taker. This is where Hybrid Mutual Funds step in. Here, we explore Hybrid Funds and talk about some essential features that you need to know before investing in them.

What are Hybrid Mutual Funds?

As the name suggests, hybrid funds are a combination of equity and debt investments designed to meet the investment objective of the scheme. Each hybrid fund has a different combination targeted at different types of investors.

How does a Hybrid Fund work?

A hybrid fund creates a balanced portfolio to offer regular income along with long-term capital appreciation. The fund manager allocates assets into equity and debt instruments according to the scheme objective, buying or selling assets as market movements become favorable.

Who should invest in a Hybrid Mutual Fund?

Hybrid funds are riskier than debt funds but safer than equity funds. They offer better returns than debt funds and are preferred by low-risk investors and new investors testing the equity markets. The debt portion provides stability while the equity portion offers growth.

Types of Hybrid Funds

Since hybrid funds have varying equity-debt allocation, they can be classified into the following types:

Factors to consider before investing in Hybrid Mutual Funds in India

Here are some important aspects to consider before investing in hybrid funds:

Tax Liability

In hybrid funds, tax on gains depends on how much of the portfolio is equity vs. debt:

Long-term capital gains from the debt component are taxed at 20% with indexation benefit or 10% without indexation.