A hybrid fund is a mutual fund which invests in two or more asset classes such as equity, hybrid, gold, etc. A hybrid fund features the potential of generating returns similar to those provided by an equity fund along with a risk quotient lower than equity funds. A hybrid fund hedges its potentially volatile equity investments by holding significant amount of debt and money market instruments in its portfolio.
Types of Hybrid Funds
As per capital market regulator Securities and Exchange Board of India (SEBI), there are 7 types of hybrid funds. They are as follows:
Conservative Fund: As the name suggests, it is a type of hybrid fund which invests a majority of its assets (around 75%-90% of total assets) in debt and money market instruments and thereby features a very low risk level.
Balanced Fund: Hybrid funds in this category invests nearly equal amount of its assets, ranging between 40%-60%, in both equity and debt instruments.
Aggressive Fund: It invests 65%-80% of its assets in equity instruments, thereby qualifying as an equity fund for tax treatment. This hybrid fund features a relatively higher level of risk.
Dynamic Asset Allocation/Balanced Advantage Fund: It has the flexibility to invest any amount of its assets (0%-100%) in equity and debt instruments. It takes portfolio positions as per the ongoing market conditions, i.e. it tends to increase equity holdings during bearish periods and reduces them during bull runs.
Multi Asset Allocation Fund: It is a unique hybrid fund which is mandated to invest at least 10% of its assets in a minimum of 3 separate asset classes. Foreign securities are not considered to be a separate asset class according to SEBI guidelines. These hybrid funds generally features equity, debt and gold in its portfolio.
Arbitrage Fund: It is a hybrid fund which invests in arbitrage opportunities with a minimum of 65% invested in equity instruments. Arbitrage exposure helps this type of hybrid fund minimise volatility for investors and reduce overall portfolio risk.
Equity Savings Fund: It is mandated to invest a minimum of 65% in equity instruments, 10% in debt instruments and the remaining balance in arbitrage opportunities. For taxation purposes, it is an equity-oriented mutual fund.