What are hybrid funds?

Hybrid funds are a type of mutual funds that let you invest in diverse assets. Here’s everything you need to know about them.

What are hybrid funds?

Unsure what assets to invest in? Hybrid funds can be a perfect investment decision. These are a type of mutual fund that let you invest in diverse assets. Usually, investments are made in a combination of stocks (equity) and bonds (debt). This is done to diversify risk and return.

Hybrid funds provide higher returns than debt funds and come with lower risk than equity-based funds. If you are a new investor who’s planning to invest in mutual funds, hybrid funds offer exposure to both stock and bond markets. 

Related: How debt and equity based mutual funds differ in risk 

How do hybrid funds work?

Trying to find a balance between risk and return? Investing in hybrid funds allows a balanced portfolio. If your goal is to achieve long-term capital appreciation along with short-term income generation, hybrid funds are your best bet. Based on your investment objective, your fund manager will allocate your money in equity and debt – in varying proportions.

You can choose to invest in either equity-oriented or debt-oriented funds. In equity-oriented funds, the proportion of investment in equities is higher than that in debt. Conversely, in debt-oriented funds, investment in debt is higher than that in equities.

In case of equities, investments are made across industries through the equity shares of companies. As for debt instruments, investments are made in fixed income securities such as debentures, bonds, and treasury bills. Since mutual funds are managed, the fund manager will buy and sell these securities based on market movements.

When markets are volatile, investments in debt acts as a safety net. Similarly, during market peaks, investments in equities increase your returns. Thus, the equity-debt mix ensures that your money is working for you.

Related: Investment options- thinking beyond the obvious 

Let us now discuss the types of hybrid funds by asset allocation:

1. Balanced funds

These funds ‘balance’ returns by diversifying your risk. Equity and equity-oriented products comprise at least 65% of the portfolio in balanced funds. The rest of the investments are made in debt securities and a small portion may be kept in cash. Balanced funds are the most popular type of hybrid funds; they are ideal for those looking to benefit from high-return equities but want to mitigate equity-oriented risk.

2. Monthly Income Plans (MIPs)

Want to play it even safer? An MIP is the way to go. This type of hybrid fund predominantly entails investment in debt instruments; only 15-20% is concerned with equities. Here, an investor gets regular returns in the form of dividends. The frequency of these dividends can be predetermined by the investor. An investor can choose between dividend and growth in a fund’s corpus.

3. Arbitrage funds

Want to benefit from the highs and lows of the equity market? Arbitrage is all about buying low and selling high. Stocks are purchased at a lower price in the primary market and sold at a higher rate in the secondary market. In fact, even when the arbitrage opportunity is absent, these funds stay invested in debt instruments and cash.

Related: How to choose an equity mutual fund 

Things to consider while investing in Hybrid funds

  1. Choose the appropriate hybrid fund based on your appetite for risk.
  2. Returns from securities also depend on asset allocation. Net Asset Value (NAV) of a fund fluctuates during market volatility.
  3. There is an expense ratio associated with hybrid funds. Ensure that you choose a company offering the lowest expense ratio.
  4. Hybrid funds can provide handsome returns in the long run.
  5. Hybrid funds can be used to meet intermediate goals since they come with a medium-term time horizon.

Hybrid funds can thus help you get the best of both worlds – equity and debt. If you are new to investing, opting for hybrid funds can also act as a gateway towards investment in mutual funds.

Disclaimer: This article is intended for general information purposes only and should not be construed as investment or legal advice. You should separately obtain independent advice when making decisions in these areas.


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