What is a hybrid fund?

A hybrid mutual fund, also known as an asset allocation fund, is a mutual fund scheme that diversifies the investment among two or more types of asset. Typically, hybrid funds invest in a mix of equity and debt instruments. Hybrid funds have become more popular as the modern portfolio theory has become the bedrock of fund management. Hybrid funds offer a wide variety of risk tolerance from conservative to aggressive based on how the funds are allocated to different asset types.

Types of hybrid funds

The Securities and Exchange Board of India (SEBI) has identified six types of hybrid funds that a fund house can offer. These are:

Let us look at the key fund types offered by reliancesmartmoney.com

How are hybrid funds taxed?

To make compliance easy, the government of India has decided not to tax the debt and equity components of hybrid funds separately. Instead, hybrid funds that allocate more than 65% of their corpus to equity are taxed as equity funds and the rest of the funds are taxed as debt funds.

Difference between hybrid funds, debt funds, equity fund

Among the three types of mutual funds, equity funds carry the highest risk and promise the highest returns as well. Debt funds, on the other hand, are the most secure investment instrument among the three – but generates low returns as well. A hybrid fund sits on a spectrum between the two based on how assets are allocated.

Equity funds, as the name suggests, invest only in equity and equity-related instruments. These can be pure equity funds, sector fund or index funds. Within equity funds, diversified large-cap funds typically carry lower risk than funds investing in mid- and small-cap stocks. Similarly, thematic or sector funds carry higher risk.

Hybrid funds can use various asset allocation strategies. The higher the exposure to debt instruments, lower is the risk such funds carry. Debt funds include gilt funds, credit funds and short-term liquid funds among others. As they invest in debt instruments alone, they carry the least risk.

Equity and debt funds are taxed differently in the current tax regime. Hybrid funds are treated as equity funds for taxation purposes if they invest at least 65% of the corpus in the equity component.