What are Hybrid Mutual Funds?

One of the most significant factors determining your investment in mutual funds is the degree of your risk appetite. Not everyone wants to invest in high-risk, high return mutual funds; similarly, those with a higher risk appetite wouldn't want to invest all of their money in low-risk low return debt funds. But then some investors would like a healthy balance of both kinds of funds. To cater to investors with a risk appetite that is neither high nor low, the third type of mutual fund exists. This mutual fund is called the hybrid mutual fund.

What is Hybrid Mutual Fund?

A hybrid fund gives the investor the best of both worlds - it is neither too risky, nor it is too low on returns. Unlike an equity fund that will only invest in equity securities or a debt fund that will only invest in government-led public sector funds, a hybrid mutual fund opts for diversification of portfolio along with minimizing risk by investing in both equity and debt securities.

Who manages Hybrid fund?

A fund manager managing a hybrid mutual fund will invest equally in debt and equity securities while keeping in mind the objective of the fund- hybrid fund managers might often reallocate assets basis the current market conditions under a hybrid mutual fund.

Now that you know what a hybrid fund is, let's explore the types of hybrid funds, who should ideally be investing in a hybrid fund and what should you remember before you invest in a hybrid mutual fund.

There are four types of hybrid mutual funds depending upon the asset allocation and investment objective of the fund.

1. Equity-oriented hybrid funds

   This is the type of hybrid mutual fund under which the fund manager will invest more than 60% of the fund's assets in equity securities and the remaining 40% in other financial investment instruments. Under an equity-oriented hybrid mutual fund, a fund manager is likely to invest in equity shares of companies across a variety of industries including fast-moving consumer goods, healthcare, automobile, non-banking finance corporations etc.

2. Debt-oriented balanced funds

   This is the type of hybrid mutual fund under which the fund manager will focus on investing a more substantial amount of the pooled money in debt funds. Close to 60% or more of the funds are invested in debt instruments like government securities, public sector bonds, debentures, treasury bills etc. The remaining 40% is invested in cash and cash equivalents.

3. Monthly Income Plans

   Slightly similar to debt-oriented balanced mutual funds, this type of hybrid mutual fund predominantly invests in debt funds but gives the investor a monthly income plan. Perfect for someone planning their retirement! About 20% of the funds are invested in high-risk, high return equity securities, and the remaining is invested in debt funds. With a monthly income plan that can be availed of in the form of monthly dividends, this type of mutual fund is well suited to investors who would like to keep tabs on their fund's performance. Additionally, a hybrid mutual fund that offers a monthly income plan also offers a growth option.

4. Arbitrage Funds

   Under an arbitrage fund, a fund manager will trade in the stock market on your behalf. They will attempt to maximize returns by buying stocks at a lower price and selling the same at higher prices in another market. Since arbitrage opportunities are not easily available, these funds invest in debt or cash instruments.

Hybrid funds are well suited to investors who want a taste of both equity and debt fund investments. Because only a specified percentage of the pooled funds are invested in equity or debt instruments, investors don't have to be on their toes worrying about the market risks, nor do they have to be disappointed with the returns. As we mentioned, a hybrid mutual fund offers you the best of both worlds.

• Risk

  Although the risk is well balanced depending on the type of hybrid mutual fund, it is still a mutual fund and is very much subject to market risks. So you must read the offer document carefully before investing.

• Returns

  The returns on a hybrid mutual fund are not guaranteed as the funds are invested in both equity and debt funds.

• Expense ratio

  Investors investing in a hybrid mutual fund should know that they will be charged for managing the mutual fund and before investing it is advised to check if the hybrid mutual fund has a lower expense ratio as the same will result in higher capital gains later.

• Taxes

  The equity component of hybrid funds is taxed like equity funds, this means that long-term capital gains over Rs.1 lakh in a financial year will be charged at 10% while short-term capital gains will be charged at 15%. As for the debt component of the hybrid mutual fund, the investor is taxed like any other regular debt fund viz. 20% on long-term capital gains.