A hybrid fund is one of the categories of mutual funds. These funds are a combination of equity and debt fund i.e. the investor has the opportunity to invest in both equity and debt funds simultaneously. In general, the equity-debt proportion of hybrid funds is 60:40. However, this may vary based on the fund’s objective and the risk preference of the investors.
Hybrid funds are an ideal option for medium-term investments. Investment in hybrid funds helps an investor to achieve diversification and thereby offers higher returns with minimal risk.
Types of Hybrid Funds
Hybrid funds are classified based on their equity-debt proportion. The various types of hybrid funds are:
1.Equity-oriented hybrid funds
In this hybrid fund, more than 65% of the fund’s assets are in equity and the remaining is in debt and money market instruments.
2.Debt-oriented balanced funds
Here, the fund manager allocates more than 65% of the fund’s assets in debt instruments (debentures, treasury bills, etc). The remaining will be invested in equity shares of companies and cash/cash equivalents.
3.Monthly Income Plans (MIP)
MIP is hybrid funds that invest mainly in debt instruments and generally have only15-20% investment in equity. This type of hybrid fund gives higher returns than regular debt funds and provides regular income to the investor in the form of dividends.
4.Arbitrage Funds
In this hybrid fund, the fund manager follows the process of arbitrage i.e. buy the stock at a lower price in one market and then sell it at a higher rate in another market thereby exploiting the difference in price and generating income.
Benefits of Investing in Hybrid Funds
Hybrid funds are considered a safer bet than equity funds. Hybrid funds are most suitable for risk-averse investors as well as new investors. The main benefits or advantage of investing in a hybrid fund are as follows:
- Hybrid funds provide an opportunity to attain the benefits of equity funds and debt funds in a single product. Hybrid funds allow the investor to balance the risk and return i.e., the equity proportion will earn better returns whereas the debt proportion will provide steady returns at minimal risk.
- Generally, it is seen that debt and equity have an inverse correlation; they move in different directions. So, a balanced fund helps in diversification (when the equity part goes down, the debt part will provide stability and lower volatility).
- Most of the balanced hybrid funds have a fixed proportion of equity (stocks) and debt (bonds). The stocks are mainly large-cap. So, there is a need for only minimal portfolio management by the fund manager. Hence, the expense ratio (the amount charged by the fund manager to manage the investment) can be lowered.
List of Popular Hybrid Funds in India
Here are some of the best performing hybrid funds available in India:
- Mirae AssetHybrid- Equity Fund
- ICICI Prudential Regular Savings Fund
- Motilal Oswal Dynamic Fund
- SBI Equity Hybrid Fund
- BNP Paribas Substantial Equity Hybrid Fund
*The order of funds mentioned above doesn’t suggest any recommendations. Investors may choose the funds as per their goals and risk capacity. Returns are subject to market risks.
