What are hybrid funds?

[Kanika Shelatkar]

Hybrid funds provide exposure to multiple asset classes e.g. equity, fixed income, gold etc. The main objective of hybrid funds is to provide asset allocation benefits to investors. Asset allocation refers to investments in multiple asset classes. By spreading your investments across multiple asset classes you can diversify portfolio risks. There are different types of hybrid schemes with different asset allocation profiles and strategies.

Hybrid fund categories

SEBI has asset allocation mandates for different types of hybrid funds.

Aggressive hybrid funds: Also known as hybrid equity funds, these hybrid funds invest 65 - 80% of their assets in equity and equity related securities and 20 – 35% of their assets in debt and money market instruments. These funds are suitable for investors with moderately high to high-risk appetites. These funds are often compared to equity mutual funds simply because the long-term return of these funds are closer to equity mutual funds.

Balanced hybrid funds: These hybrid funds invest 50% of their assets in equity and equity related securities and 50% of their assets in debt and money market instruments. An AMC is allowed to offer either aggressive or balanced hybrid fund, but not both.

Dynamic asset allocation funds: These funds are also known as Balanced Advantage Funds. These funds dynamically manage their asset allocation according to market conditions. These funds are suitable for investors with moderately high to high risk appetites.

Equity savings funds: These hybrid funds can partially hedge their equity allocation using derivatives, while maintaining gross equity allocation of at least 65%. These funds must invest at least 10% of their assets in debt and money market instruments. The risk profile of equity savings fund is usually lower than aggressive hybrid and dynamic asset allocation funds.

Multi asset allocation funds: These funds invest in three or more asset classes e.g. equity, debt, gold, real estate investment trusts (REITs) and infrastructure investment trusts (InvITs) etc. Multi asset allocation funds must invest at least 10% each in three asset classes e.g. minimum 10% in equity, minimum 10% in debt and 10% in gold.

Conservative hybrid funds: These funds invest 75 - 90% of their assets in debt and money market instruments and 10 – 25% of their assets in equity and equity related securities. Since these funds have high allocations to fixed income compared to the above hybrid categories, their risk profile is lower.

Arbitrage funds: These funds can fully hedge their equity exposure using arbitrage strategy. Arbitrage funds must maintain gross equity allocation of at least 65%. Maximum investment in debt and money market instruments is capped at 35%. Since the risk profile of these funds is very low (arbitrage is a risk-free strategy), investors can use hybrid funds to park their idle funds for a few weeks or months. Arbitrage funds are more tax efficient than liquid or overnight funds.

Who should invest in hybrid funds?

Hybrid funds are suitable for investors who want capital appreciation and income; select the appropriate fund based on your investment needs.

Investors who do not have high to high-risk appetites that are needed for equity mutual funds. Different hybrid funds have different risk profiles; invest according to your risk appetite.

You need to have sufficiently long investment horizons for hybrid funds (excluding arbitrage funds).

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