What is Hybrid Mutual Funds? Types and Benefits of Hybrid Funds?

A hybrid mutual fund is nothing more than a mix of equities and debt funds. They invest in shares of firms listed on the exchange, just as equity funds. They invest in fixed income securities such as bonds, debentures, and Treasury bills, just as debt funds.

• Hybrid funds invest in a combination of three major asset classes: stocks, bonds, and commodities.
• The stock element of the portfolio has grown in value.
• Debt and gold allocation provide steady growth.
• Hybrid mutual funds are open-ended funds that are actively managed. This means you may put money into them and take money out during the year. There is no such thing as a lock-in period. In India, there are seven main types of hybrid funds.

What are the benefits of a hybrid fund?

Hybrid funds combine the best of all worlds for investors, including stock, debt, gold, and other commodities. With just one plan, investors may invest in all of these asset groups. The following are five major advantages of a hybrid mutual fund:

• With a single fund, you may invest in numerous asset types.
• Diversification is essential.
• Rebalancing is done on a regular and automated basis when the fund management monitors the portfolio.
• Adaptable to a wide range of risk profiles. High-risk investors might choose between an aggressive hybrid fund and a dynamic fund. Arbitrage or cautious hybrid funds are good options for low-risk investors.

Types of Hybrid Mutual Funds

Hybrid funds come in seven main varieties. Let's take a look at each one separately.

1. Aggressive Hybrid Fund: An aggressive hybrid fund spends the bulk of its assets in the stock market. It has the ability to invest 65 percent to 80 percent in stock and the remaining 20 percent to 35 percent in debt. Only ambitious investors with a long-term investing perspective should consider it. The aggressive hybrid funds have the advantage of being taxed as equity funds yet investing 20 percent to 35 percent in debt. As a result, the holding period is 12 months rather than 36 months.
2. Conservative Hybrid Funds: This is a hybrid fund that focuses on debt. It has the ability to invest 75-90 percent in debt and 10-25 percent in equity. Because of the high exposure to debt, these funds are less volatile and risky than aggressive hybrid funds. They use debt taxation, which means they have a 36-month holding period. The 10–25% equity exposure helps them outperform pure debt products.
3. Balanced Advantage Fund: This hybrid fund combines aggressive and cautious strategies. It has 40% of its assets in shares and 60% in debt. An Asset Management Company (AMC) can only have one of two types of funds: aggressive hybrid or balanced advantage. These are a little more aggressive in nature and are best suited for investors who are willing to take moderate risks.
4. Dynamic Asset Allocation Fund: The term dynamic implies that the equity-debt allocation is not fixed. Based on market movements, the fund management might transfer 100% of the corpus to equities or debt. As a result, they are riskier than conservative or balanced funds.
5. Equity Savings: This hybrid fund invests in stocks, bonds, cash, and futures, among other things. It uses futures to mitigate direct stock risk and volatility. It engages in arbitrage or simultaneous buying and selling in the cash and futures markets.
6. Multi-Asset Allocation Funds: This is a true type of hybrid fund as it invests a minimum of 10% in each of the asset classes…equity, debt, and gold. It truly gives you the best of all worlds in just one scheme.
7. Arbitrage Funds: This is a unique type of hybrid fund which carries the lowest risk. It buys shares in the cash market and simultaneously sells them in the futures market. The net position remains nil. So, the scheme carries the lowest risk.

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