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What are different types of hybrid mutual funds?

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There are three broad types of mutual fund schemes – equity, debt and hybrid funds. Equity funds invest primarily in equity/ equity related securities with capital appreciation objective. Debt funds invest in debt/ money market instruments with income generation objective. Hybrid mutual funds invest in multiple asset classes e.g. equity, debt, etc.

Types of hybrid funds

Hybrid funds are of various types with different asset allocations. The asset allocation of one hybrid fund can be very different from the other type of hybrid mutual fund. Due to different risk profile, the risk characteristics of different types of hybrid mutual funds can be very different. Let us discuss some different types of hybrid funds –

Aggressive Hybrid Funds

Aggressive hybrid funds can invest 65 – 80% of their assets in equity / equity related securities and 20 – 35% in debt / money market instruments. Since aggressive hybrid funds, earlier known as balanced funds invest minimum 65% of their assets in equity, their performance in different market conditions may be like equity mutual funds but with lesser downside risk in market corrections. Aggressive Hybrid Funds suits investors wanting lesser downside risk yet want to invest in equities for capital appreciation. One should have high risk appetite and minimum 5 year investment tenure for these schemes.

Balanced Advantage Funds

Balanced Advantage Funds or Dynamic Asset Allocation are type of balanced mutual funds which invest dynamically in debt and equities based on market levels. These hybrid funds usually reduce equity allocations in high market valuations and increase in low market valuations. Investors who want to invest in equities for wealth creation, but worry about market risk can invest in balanced advantage funds.

Multi Asset Funds

Multi Asset hybrid mutual Fund invest in at least three asset classes with 10% minimum allocation in each. The three main asset classes are equity, debt and gold. Moderately high risk takers with minimum 4-5 years investment horizon can invest in these mutual fund schemes.

Conservative Hybrid Funds

Conservative hybrid funds can invest 75 – 90% of their assets in debt/ money market instruments and 10 – 25% in equity/ equity related securities. Therefore, they are less volatile compared to aggressive hybrid funds. Investors concerned about capital safety but can take little bit of equity risk can invest provided they have minimum 4-5 years tenures.

Equity Savings Funds

Equity savings funds are hybrid mutual fund schemes which use hedging to manage its net long equity exposure with aim to generate arbitrage profits. While doing hedging equity savings funds aim to maintain gross equity exposure above 65% to enjoy equity taxation. This mutual fund investment is good for moderate risk investors with 3-4 years investment tenures.

Arbitrage Funds

Arbitrage funds are hybrid funds which follow arbitrage strategy to earn risk free profits by exploiting price difference of the same underlying asset in different market segments. They can also invest up to 35% of their assets in debt/ money market instruments. This mutual fund is suitable for investors who are concerned about capital safety.