Hybrid funds are a type of mutual fund where money is invested in two or more asset classes, including debt and equity. The main philosophies behind such funds are diversification and asset allocation.

Depending upon the proportion of investment in each asset class and the scheme’s objective, hybrid funds are of various types. To help you choose the right scheme, we have covered the necessary details regarding hybrid mutual funds.

The hybrid fund meaning is inlaid in its name. The portfolio of this type of mutual fund schemes comprises a prudent mix of financial instruments to achieve diversification. This, in turn, mitigates investment risk. Fund managers of hybrid schemes vary the proportion of investment in debt/equity, or any other asset class to fulfil the fund’s objective.

After knowing what a hybrid mutual fund is, it is vital for individuals to become familiar with its various types.

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As noted above, hybrid funds allocate their pooled funds to both equity and debt instruments. Accordingly, these schemes can provide investors with the best of both avenues. The equity exposure can generate high returns but the associated financial risk is high. At the same time the debt instruments in the portfolio provide stability, thus mitigating the investment risk.

Fund managers of these schemes maintain a prudent mix of equity and debt to fulfill the objective of the fund.

Here are some benefits of investing in hybrid funds:

• Active management of portfolio risk: Such mutual fund schemes ensure active management of financial risk via diversification as well as asset allocation.
• Suitable for different risk profiles: Investors can choose a hybrid fund that is suitable for their risk profile. For example, individuals who have high risk-bearing ability might want to consider investing in aggressive hybrid funds. Whereas, individuals with a low risk appetite find conservative funds to be a suitable option.
• Diversification: These funds provide diversification across different asset classes and their subclasses. For example, the equity portion of the portfolio may include small cap, mid cap and large cap stocks.
• Active rebalancing: Fund managers of these funds rebalances the portfolio according to the changing market conditions to generate returns for investors. Note that they take all buy-and-sell decisions considering the scheme’s objective.

Hybrid funds are safer than equity funds, but riskier than debt funds. Accordingly, these are suitable for investors who are seeking higher returns than debt mutual fund schemes. That said, note that the risk-reward ratio depends on the proportion of investment in equity and debt.

In case investors want to safeguard their portfolio value from market volatility, they might consider allocating funds to a debt fund scheme that allocates a higher percentage of its assets to debt securities.

After selecting a hybrid fund to invest in, individuals must decide whether to opt for a direct plan or a regular plan. The former is offered by fund houses directly. That said, in case of the latter, individuals need to route their investments via a broker or distributor.

To invest in a scheme’s direct plan, investors can apply via certain online third-party platforms/mobile apps. Alternatively, they can visit a branch of the fund house directly or visit the AMC’s website to invest.

One can  follow these  steps to invest via an AMC’s website:

1. Browse the website of the fund management company.
2. Create an account for login.
3. Fill up the form mentioning all details.
4. Provide KYC and other mentioned documents.
5. Select preferable hybrid fund options.
6. Submit details.
7. Make payment.
8. Retrieve the account details and investment details.
9. You may also request to connect with a fund manager by clicking on the respective option.

Once deciding which plan to opt for, investors must pick the investment mode. They may choose the lump some route, which allows them to invest the entire savings available with them in one go. Or, they can invest through a systematic investment plan (SIP). This mode allows them to invest a fixed amount at regular intervals.

Here are some aspects  to consider before investing in hybrid funds:

• Risk Factor: The risk factor primarily depends on the percentage of equity holding. Since the risk-bearing capacity of all investors is not identical, it is vital to check the portfolio constituents before investing.
• Past Returns: Return is not guaranteed in case  of hybrid funds. For investors, it is key to check the past returns of a scheme before investing as it gives an idea regarding the scheme’s consistency in terms of performance. However, note that the past returns are not an indicator of a scheme’s future performance.
• Cost: Hybrid mutual funds impose  an annual fee on investors known as expense ratio to cover the cost of running the fund. When comparing different hybrid schemes, investors might want to consider this aspect before making a decision. After all, this yearly fee has an impact on their returns.
• Investment Horizon: Investors must decide their investment time horizon when investing in a hybrid fund. It refers to the time period  for which they’ll stay invested in a scheme. Note that there is no ideal duration for such investments. Individuals may want to hold their units for as long as possible to benefit from the power of compounding.
• Financial Goals: Financial goals vary from one individual to another. Before investing in any hybrid fund, make sure that the investment objective of the fund is in line with your requirements.
• Tax on Gains: Hybrid funds that invest a minimum of 65% of its fund corpus in the equity asset class are taxed as equity funds. This means that if investors redeem their units before the completion of 1 year from the purchase date, they earn short term capital gains (STCG). A flat tax rate of 15% is applicable on such returns. However, if investors sell their units after 1 year, they earn long term capital gains (LTCG), which attract 10% tax.

Remember, no tax is applicable on LTCG of not more than Rs. 1 lakh.

On the other hand, hybrid funds investing a minimum of 65% of their financial assets in debt instruments are taxed as debt funds. Accordingly, if individuals sell his/her units before 3 years from the date of purchase, they earn short-term capital gains. The realised gains are taxed according to the slab rate that is applicable.

Upon redemption of units after 3 years, long term capital gains (LTCG) are earned by investors. A tax rate of 20% is applicable for such gains. Furthermore, investors are eligible for indexation benefits.