ALL ABOUT HYBRID FUND

The word hybrid means, “a thing made by combining two different elements.” Then, why is any mutual fund called a hybrid fund? Hybrid fund is made by combining both equity and debt which means investor can invest in both equity and debt fund with single hybrid fund. Lets read about what is hybrid fund, types and advantages of hybrid fund.

Mutual funds: According to the Association of Mutual Funds in India(AMFI), mutual fund is a pool of money managed by a trust that collects money from a number of investors sharing similar investment objectives and invests the same in equities, bonds, money market instruments, and/or other securities.

Mutual funds offer a diverse choice of investment options. There are mainly 3 types of mutual funds, Equity, Debt and Hybrid. The investor can choose a suitable option depending on the risk appetite, duration of investment, individual financial goals, etc. Lets discuss what is hybrid fund, types of hybrid fund, taxation of hybrid fund in detail.

What is hybrid mutual fund?

Hybrid fund is a type of mutual fund which invests in more than one asset class i.e. equity, debt and other asset classes depending on the investment objective of the scheme. Hybrid fund diversifies investment in different asset class to minimize the risk. Hybrid fund is less riskier than equity fund but generates better return than debt fund.

What are the types of hybrid fund?

Equity-oriented hybrid fund / Aggressive hybrid fund	At least 65% of portfolio is invested in equity market and rest 35% is invested in debt market or other money market instrument. Aggressive hybrid fund can generate better return but more riskier than conservative hybrid fund.
Debt-oriented hybrid fund / Conservative hybrid fund	At least 65% of portfolio is invested in fixed income securities like Commercial Papers(CPs), Certificate of Deposit(CD), T-bills, corporate bonds and other money market instruments. The remaining part is invested in equity or equity related instrument. Risk is lesser than aggressive hybrid fund.
Dynamic Asset Allocation Fund / Balanced advantage fund	Dynamic asset allocation fund dynamically invests in both equity and debt. An asset allocation depends on the current market conditions and is based on an internal investment model. It can be 100 percent debt to 100 percent equity asset class. These funds are suitable for investors who want to automate their asset allocation.
Multi Asset Allocation Fund	Multi Asset Allocation Fund invests a minimum of 10% of its portfolio in at least 3 asset classes, equity, debt and gold related instruments including ETF or such other asset classes as SEBI may prescribe from time to time. Allocation can be increased or decreased according to the current market condition
Monthly Income Plan(MIP)	MIPs are debt oriented and invest in safe government debt but pay out the gains on a monthly basis. Monthly income plans(MIP) is a good plan for senior citizen. This is a good option when you can take risk. MIPs are normally hybrid funds and MIP Ration of investment is 20% to 30% in equity market and 70% to 80% in debt market. You can receive monthly income by selecting a dividend pay-out option.
Arbitrage Fund	Arbitrage funds invest in one market and sell at higher price in another market. So, arbitrage fund earns profit from the difference in price between 2 markets usually the cash market and the futures market. These funds purchase stocks in the cash market and simultaneously sell it in the futures market. Arbitrage Funds have a minimum of 65% of exposure to equity and the rest in debt and money market instruments which is done on a tactical basis. Arbitrage fund is suitable for investors which low-risk capacity and who want to generate debt like returns with equity taxation in a high volatility period.
Equity Savings Fund	Equity Savings Funds invest in equity, derivatives, and debt to try to balance risk and returns. Derivatives reduce equity exposure and volatility. So, it generates a stable return. The equity asset provides growth. Debt and derivative provides the regular stable returns. These schemes invest 65 to 100 percent in equity assets and 0 to 35 percent in debt asset classes.

What are the benefits of hybrid fund?

Hybrid funds are classified into various types depending upon the types of assets in which they invest and pattern of allocation. Following are the various types of hybrid fund.

Diversification	Hybrid fund invest in multiple asset classes so investors receive the benefit of diversification. Diversification helps reduces risk and performance as one asset class balances risk and performance of another asset class. Investors receive stable income.
Convenience	Hybrid funds invest in multiple asset classes which give investors exposure to equity, debt, gold related instruments (including ETF) and other asset classes. Exposure to different asset classes depend on the type of fund and its investment objective. So, investors dont need to invest separately in each asset class and it reduces the for investing in each asset class based fund.
Caters to various risk profiles	Hybrid funds offer different levels of risk tolerance ranging from conservative to moderate and aggressive. Equity-oriented schemes are for the risk taker and debt oriented schemes are for the risk averse. The Dynamic Asset Allocation Fund is for those who do not want to stick to a fixed Asset allocation. But want to go with the basic market views without taking the calls themselves. Arbitrage funds are for investors who are looking for stable returns in a volatile environment.

What are the things to consider before investing in hybrid mutual fund?

Mutual fund carries risk with it, though it can be low, moderate or high. It depends upon the type of asset in which mutual fund invests its capital. Though hybrid fund carries moderate risk, investors need to know about few things before investing in hybrid fund.

Returns	Hybrid Fund doesn’t offer guaranteed return as the return is affected by the performance of the underlying investments. As hybrid fund invests part of its capital asset into equity so the return depends upon equity market. The returns of an aggressive oriented hybrid fund will be more affected by the equity markets as compared to the balanced and conservative-oriented hybrid fund. Dynamic Asset Allocation fund can move its investment between equity and debt market, can also increase/decrease their allocation to equities and debt depending upon the outcome of financial model.
Risk	As hybrid fund invests its potion in equity, it carries moderate risk. The higher the equity component, the riskier the fund. The risk depends upon the equity market in which the fund has invested and the strategy used for investment. A debt fund that gets return from interest interest of debt securities may be less risky than a fund which depends on gains from price appreciation. Arbitrage funds are low-risk products as no directional call is taken.
Time Horizon	Hybrid funds are suited for a medium-term time horizon say from 3-5 years. The longer the time horizon, the better the chances of getting stable, higher returns.
Cost	Mutual fund charge a fee, expense ratio. Lower expense ratio is beneficial for investors as high expense ratio may impact the fund return.
Investment Strategy	As hybrid fund is a mixture of debt, equity or any other asset. So, the proportions in each asset and the investment style are determined by the fund managers. Investors cannot decide how the various components may be chosen or combined.

How are hybrid funds taxed?

The equity component of hybrid funds is taxed like equity funds: Long-term capital gains over Rs.1 lakh on equity component are taxed at the rate of 10%. Short-term capital gains (STCG) on equity component are taxed at the rate of 15%.

The debt component of hybrid funds is taxable as any other debt fund: Investors need add these gains to your income and taxed as per your income slab. LTCG from debt component is taxable at 20% after indexation and 10% without the benefit of indexation.

Also read: HOW TO SAVE TAX BY INVESTING IN MUTUAL FUNDS

Takeaway:

We read what is hybrid fund and its various types. There are lot of options available when you want to invest in mutual fund. The fund is selected as per investor’s risk capacity, time horizon, financial goals, etc. Hybrid fund carries moderate risk and it invests in multiple assets to balance the risk.