Hybrid Funds

About Hybrid Mutual Funds

As the name suggests, hybrid mutual funds invest in a diversified portfolio of two or more assets like equity, debt, gold, international equities, etc. To cater to the risk profile of various investors, hybrid mutual funds are further classified into various categories based on their risk exposure and underlying assets. They are:

1. Based on equity-debt allocation:

1. 1. 1. Debt-oriented hybrid funds: have an equity exposure of 65% or less.
      2. Equity-oriented hybrid funds: have an equity exposure of over 65%
      3. Aggressive hybrid funds: open-ended hybrid schemes that invest between 65% and 80% in equity and related instruments.
      4. Equity Savings: have debt exposure of up to 35%. Rest in invested in equity and arbitrage opportunities
      5. Conservative hybrid fund: open-ended hybrid funds that invest between 75% and 90% in debt/fixed income generating securities like Commercial Papers(CPs), corporate bonds, T-bills, Certificate of Deposit (CDs), and other money market instruments

2. Based investment solutions:

1. 1. 1. Dynamic asset allocation: invests dynamically in both equity and debt based on the changing market conditions to offer superior returns
      2. Multi-asset allocation: invests a minimum of 10% in at least three asset classes and modifies its allocation based on the prevailing market conditions. These funds typically invest in assets like equity, debt, gold, ETF, etc.
      3. Retirement solutions: invests in assets suitable for building retirement corpus

3. Other categories :

1. 1. Arbitrage funds: uses the strategy of buying and selling securities in two different markets (cash and futures markets) simultaneously to profit from price differences. These have at least 65% gross exposure to equity
   2. Hybrid FoF: these are readymade portfolios of equity and debt funds

How do Hybrid Mutual Funds Work?

Hybrid mutual funds invest in both equity and debt securities. They are also known as balanced funds and are designed to meet the investment objectives of the scheme. The fund manager creates a portfolio according to the investment objective of the scheme and allocates the funds in equity and debt instruments in varying proportions. Therefore, the proportion of debt and equity investments may vary from one hybrid fund to another.

Hybrid funds allow investors to make the most out of equity investments while cushioning themselves against extreme volatility in the market. These aim to generate higher returns in exchange for lower risk depending on the investment goals of the investors. Hybrid funds combine the risk and return of both equity and debt funds. These provide active risk management through portfolio diversification and asset allocation.

Features of Hybrid Mutual Funds

1. Hybrid mutual funds invest in a mix of asset classes like equity, debt, gold, etc.
2. Based on the risk exposure of underlying assets, hybrid funds come in various types like debt-oriented hybrid funds, equity-oriented hybrid funds, etc
3. Hybrid funds offer the best of both worlds - capital protection of debt and wealth creation of equity.
4. Hybrid funds are ideal options to save for medium-term goals.
5. Since hybrid funds invest in equity and debt, returns from these funds attract capital gain tax based on the equity and debt components. Read more on this in the next section.
6. Hybrid funds offer higher returns than fixed-income instruments like an FD and liquid funds.
7. Hybrid funds are relatively less volatile than equity funds.

Advantages of Investing in Large Cap Funds

1. Diversification benefits: Since hybrid funds invest in a mix of asset classes, these offer significant benefits of diversification. As such, your overall risk is balanced. In this sense, the risk of underperformance of one asset class is set off by the performance of another asset class.
2. Best of all worlds: Hybrid funds benefit from the features of all asset classes included in the portfolio. These enjoy capital appreciation of equity, low volatility and capital protection of debt, stability of gold, the price difference of arbitrage, and high liquidity of cash market instruments depending on the type of hybrid funds.
3. Convenience of investment: Since hybrid funds invest across asset classes, you can park your investments in these rather than individual assets. Not only could this reduce your cost of investment, but it also lowers the overall risks and optimises returns.

Risks Involved in Hybrid Funds

1. Market risk: These funds can be impacted by market fluctuations. In the event of a market downturn, these funds run the risk of declining in value.
2. Interest rate risk: Changes in the interest rate can impact the value of the bonds held in the fund. If interest rates rise, the value of bonds can decline, impacting the overall fund value.
3. Credit risk: Hybrid funds invest in investment-grade and high-yield bonds; the latter has a higher credit risk than the former. If a company defaults on its bond payments, it can negatively impact the fund's value.
4. Management risk: The fund manager's expertise plays a key role in the performance of hybrid funds. Any wrong decision the fund manager makes can negatively impact the fund’s performance.
5. Liquidity risk: These funds can invest in small cap stocks and less-traded bonds, which can be difficult to sell. This can impact the value of the fund during market downturns.

Factors To Consider Before Investing in Hybrid Mutual Funds

By evaluating the following factors, you can make informed decisions when investing in hybrid mutual funds that align with your financial objectives and risk tolerance.

1. Investment Objective: Determine your financial goals and risk tolerance. Hybrid funds offer a mix of stocks and bonds, so align your objectives with the fund's asset allocation.
2. Asset Allocation: Understand the fund's allocation between equity and debt. Balanced, aggressive, and conservative hybrids have varying risk profiles, so choose one that suits your risk appetite.
3. Risk and Return: Assess the fund's historical performance, volatility, and potential returns. Balanced funds aim for stability, while equity-oriented hybrids may offer higher growth but come with more risk.
4. Fund Manager: Research the fund manager's track record and experience in managing hybrid funds. Skilled management can impact fund performance.
5. Tax Implications: Be aware of the tax treatment of hybrid funds. Equity-oriented hybrids enjoy more favourable tax treatment than debt-oriented ones. Consider the tax implications based on your investment horizon.

Who Should Invest in Hybrid Mutual Funds?

Now that you know the hybrid mutual funds meaning, let's look at who can consider investing in these:

1. Hybrid mutual funds are ideal for those looking to get exposure to both debt and equity
2. Since these funds invest in a diversified portfolio to minimise the risk, investors with moderate risk appetite and return expectations can consider these funds.
3. Investors looking to earn relatively higher returns than debt funds can go for hybrid funds as they have the potential to generate better returns than the latter.
4. If protecting your capital while earning moderate returns is paramount for you, conservative hybrid funds are among the best-suited ones.
5. In case you don’t have the appetite to stomach the risk of equity funds, an equity savings fund can be a good option for you as they have major exposure to debt.
6. You can consider investing in a hybrid mutual fund in case you have to meet medium-term goals - those you want to achieve in 3 to 5 years. Examples are repaying debt, saving for a down payment for a property, buying a new vehicle, saving for children’s education, renovating your house, etc.

Investors with a moderate risk appetite looking for a diversified portfolio can consider investing in a hybrid mutual fund.

Taxability of Hybrid Funds

In case of a hybrid mutual fund, gains are taxed in a different way. Equity-oriented hybrid mutual funds and arbitrage funds are taxed like equity-oriented funds. Further, a fund with a minimum of 65% in equity or related securities is deemed to be an equity-oriented fund for tax purposes and all other schemes, as others.

Take a look at how these are taxed:

1. Equity component of the hybrid fund is taxed like equity funds:
   • Gains on units held for less than a year attract Short-term Capital Gains (STCG) and are taxed at 15%.
   • Gains on units held for over a year exceeding ₹1 lakh in a financial year attract Long-term Capital Gains (LTCG) of 10% without indexation.
2. Debt component of the hybrid fund is taxed like debt funds:
   • Gains on units held for less than 3 years are treated as STCG and will be added to the income and taxed as per your tax slab
   • Gains on units held for more than 36 months are treated as LTCG and are taxed at 20% after indexation
3. Dividend Taxation
   • The dividend income is added to the investor’s taxable income and taxed as per their slab. There is also a 10% TDS charged by the mutual fund house on the dividend amount exceeding ₹5,000 in a financial year.

How to Invest in Hybrid Mutual Funds?

Investing in Hybrid Mutual Funds through your Angel One account is a straightforward process. Here are the steps involved:

Step 1:

• Log in to your Angel One account using your registered mobile number.
• Verify the OTP sent to your mobile and enter your MPIN.

Note: If you don't have a Demat account with Angel One, you can easily open one by completing the KYC process and providing the required documents.

Step 2:

Choose the most suitable fund based on your financial goals and risk tolerance. You can explore the available funds in the mutual fund section of the Angel One app.

Consider the following factors:

• Search for the specific fund you wish to invest in or take guidance from funds recommended by Angel One across various categories.
• Analyse the fund's historical performance, tax implications, constituent sectors, and stocks.
• Estimate potential returns using the provided calculator.
• Assess the level of risk associated with the fund and compare it with your risk tolerance.
• Take into account the fund's ratings from reputable rating agencies, typically on a scale of 1 to 5.
• Consider the fund's expense ratio to understand the cost of your investment.

Step 3:

After finalising the fund(s) you want to invest in, navigate to the Mutual Funds section within your Angel One account. Since this investment may be long-term, exercise caution in selecting the fund that aligns with your goals.

During this stage, consider the following:

• Decide whether you want to invest a lump sum or through a monthly SIP (Systematic Investment Plan).
• Enter the desired investment amount and select your preferred payment method. UPI is the recommended choice, but you can also opt for net banking.
• If you're choosing the SIP route, you can set up a mandate for hassle-free future contributions.

Top 5 Hybrid Mutual Funds

The above-mentioned top mid-cap funds are for informational purposes only and are not recommendations. The funds are ranked based on 5-year CAGR as of January 2025.

Quant Multi Asset Fund

The Quant Multi Asset Fund ranks 1st based on its 5-year CAGR of 27.47%. It has an AUM of ₹3,201.26 crore and an expense ratio of 0.61%, which is the 2nd lowest among the 5 funds.

The fund’s Sharpe ratio is 0.80, ranking 2nd in the list. Over the past 3 years, it has delivered a CAGR of 19.47%, ranking 3rd in 3-year performance.

JM Aggressive Hybrid Fund

The JM Aggressive Hybrid Fund ranks 2nd with a 5-year CAGR of 23.84%. It has the lowest AUM among the 5 funds, at ₹762.93 crore, and an expense ratio of 0.67%.

The fund’s Sharpe ratio of 0.56 is the 3rd lowest in the list. Over the past 3 years, it has delivered a CAGR of 21.13%, the highest among the 5 funds.

Bank of India Mid & Small Cap Equity & Debt Fund

The Bank of India Mid & Small Cap Equity & Debt Fund ranks 3rd with a 5-year CAGR of 23.35%. It has an AUM of ₹1,107.71 crore and an expense ratio of 0.82%.

The fund’s Sharpe ratio of 0.38 is the 2nd lowest in the list. Over the past 3 years, it has delivered a CAGR of 16.03%, ranking 4th in 3-year performance.

Quant Absolute Fund

The Quant Absolute Fund ranks 4th with a 5-year CAGR of 23.29%. It has an AUM of ₹2,115.36 crore and an expense ratio of 0.72%.

The fund’s Sharpe ratio of -0.09 is the lowest in the list. Over the past 3 years, it has delivered a CAGR of 14.05%, the lowest among the 5 funds.