What is Hybrid Mutual Fund? Types of Hybrid Fund & who should invest?

by Rishabh Jain
Hybrid Mutual Fund

What is Hybrid Mutual Fund?

Hybrid Mutual Fund is a fund that invests in both Equity and Debt instruments in different proportions. In other words, it is a combination of both equity and debt securities. This makes Hybrid Funds riskier than Debt Funds and comparatively safer than Equity Funds.

How does a Hybrid Mutual Fund work?

Since Hybrid Funds invests in both Equity and Debt instruments, therefore it aims to create a balanced portfolio for you. The presence of both fixed income securities and equity markets makes it possible for Hybrid Funds to offer regular income in the short run and capital appreciation in the long run.

The proportion in which the Hybrid Fund Manager allocates your money in both equity and debt instruments depends on the objective of that Scheme/Fund.

Types of Hybrid Fund

1. Equity-oriented Hybrid Funds

As the name suggests, Equity-oriented Hybrid Fund focuses more on Equity instruments (like shares of different companies) than on Debt. These Funds invest at least 65% of the total assets that it has under management in equity, and the remaining portion is invested in debt securities.

These Funds are more suitable for people who can afford to take some risk as most of the funds here are allotted to Equity than in Debt and thus these funds also can give you higher returns.

2. Debt-oriented Hybrid Funds

In Debt oriented Funds the Fund Manager invests at least 65% of the total assets in Debt securities (like debentures, government securities, corporate bonds, treasury bills, etc.) and the remaining portion is invested in the Equity component.

These Funds are more suitable for Conservative investors as most of the Funds are allotted to Debts securities, making it comparatively safer. Thus these Funds will give you less return as compared to Equity-Oriented Hybrid Fund.

3. Monthly Income Plans (MIP)

Monthly Income Plans (MIP) are Hybrid Funds that invest in a combination of Equity and Debt. The proportion contributed to Debt instruments is generally higher than the Equity, as MIP aims to provide stable returns in the form of interest and dividend payments. You can choose the intervals of the payment of dividends/returns; it can be – monthly, quarterly, semi-annually, and annually.

Different MIP invests in different proportions, but generally prefers less contribution to equity instruments. For example, Some might invest 30% of total assets in equities while some may invest 10% in equity instruments.

Well, the interesting part is by the name of the Fund you might think that you would be getting the returns regularly every month surely. But that is not true, as there is no obligation on the MIP Hybrid Fund to make monthly dividend/interest payments. When the markets aren’t performing well and are into losses, it may even skip the dividend payments.

These Funds are suitable for retired people because after retirement they don’t have a regular source of income, and MIP Funds provide a steady stream of income in the form of Dividends and Interest payments.

4. Arbitrage Fund

Let us understand the meaning of Arbitrage first right? So, Arbitrage means taking advantage of the difference in prices of the same asset in different markets.

For example, We know that the Indian Stock Market has two exchanges i.e. National Stock Exchange( NSE) and the Bombay Stock Exchange (BSE). You should know that there is a slight difference in prices of the same stock in both the exchanges because of the demand and supply difference. Now suppose a stock XYZ is trading at Rs 21 in NSE and at the same time that stock is trading at Rs. 21.5 in BSE. So here you might buy the stock XYZ in NSE and sell it in BSE to take the advantage of Rs. 0.5 per share.

Since we know what Arbitrage means, In Arbitrage Fund the Fund Manager buys the stock at a lower price in one market and sells it at a higher price in another market to earn higher returns. But there can also be times when the Fund Manager might not get such an arbitrage opportunity. So in the absence of such an opportunity, the Fund Manager generally sticks to Debt securities and Cash that might give steady returns.

Who should invest in Hybrid Mutual Fund?

Hybrid Mutual Funds are most suitable for investors who want to invest in a mix of Debt and Equity instruments under the same roof. These Funds are safer than Equity Funds and provide comparatively higher returns than Debt Funds.

You as an investor should invest in Hybrid Mutual Funds if you can afford medium risk as the presence of an equity component makes it a little risky than Debt Funds. These funds can provide higher returns because of the equity component and at the same time, the Debt component would keep you on a safer side during high fluctuations in the equity market. Therefore, Hybrid Funds become an effective way to be on the safe side and earn high returns simultaneously.

What are the benefits of investing in a Hybrid Fund?

Well, there can be many benefits of investing in Hybrid Funds. Some of the benefits that might be useful for investors are mentioned below:

#1 Balance in Risk and Return

The most important benefit of Hybrid Funds is that you can get a balance in risk and return. Since they invest in a mix of equity and debt instruments, the equity portion will provide you better returns. The debt portion will provide you stable returns and save you from the high volatility of the equity market.

#2 Diversification

Diversification plays an important role to be on the safe side. As an investor one should diversify their portfolio by investing in different types of assets and not stick with only equity, as a certain fall in equity will eat up all your funds. Investing in Hybrid Fund helps you diversify your portfolio under one roof as it invests in both equity and debt instruments. Thus, a fall in any one asset may be equity or debt would not eat up your whole portfolio.

#3 Suitable for a First time Investor

Many investors might want to invest in Equity funds but are not able to because of the risk involved in it. So, by investing in Hybrid Fund you can get exposure to the equity market without having to take many risks.

Tax Policy of Hybrid Mutual Fund

People are generally confused as to how Hybrid Funds are taxed as it invests in both Equity and Debt instruments. Let us understand it simply. The equity component of the Hybrid Funds is taxed like other Equity Funds and the Debt component is taxed like other Debt Funds.

For example, Equity-oriented Hybrid Funds invests at least 65% of the total assets in equity instruments and the rest in debt, so it will be taxable as other equity funds because most of the funds are allotted to the equity component. Similarly, the Hybrid Funds that invest a major proportion in Debt securities are taxed like Debt Funds.

Long Term Capital Gain (LTCG) on the Equity component (i.e. if held more than 1 year) over and above the minimum deduction of up to 1 Lakhs is taxable at 10%. And (STCG)- Short Term Capital Gain ( i.e. if held for less than 1 year) is taxable at 15%.

Similarly, LTCG on the Debt Component (i.e. if held more than 3 years) will be taxable at 20% and STCG will be taxable according to the tax slab that you fall into.


Hybrid Mutual Funds are the best way to diversify your portfolio and attract new investors who might not want to invest directly in the Equity Funds because of the risk factor. However you should know that Hybrid Funds are not completely risk-free, the presence of Equity makes it a riskier investment than Debt Funds. And with risk comes the reward too.

But how long should one aim to stay invested in Hybrid Funds? Hybrid Funds would give good returns if you stay invested for a medium time frame, i.e., 5 years or more.

When investing the most common mistake made by investors in search of the best Mutual Fund, they don’t bother to understand themselves or the fund they are investing in. But to get the expected results you need to know how to choose the funds, how you can invest, and the type of Funds that would be suitable for you.


What is Hybrid Mutual Fund?

Hybrid Mutual Fund is a type of fund that invests in both equity and debt instruments in different proportion.

Are Hybrid Mutual Funds more risky than Equity Funds?

No, Hybrid Mutual Fund is less riskier than equity funds.The presence of debt component makes it less risky than equity funds as they offer stable returns.

What makes Hybrid Fund attractive?

The presence of both equity and debt instruments under the safe roof makes it attractive and helps the investor to diversify without having the effort to invest in both these instruments or funds separately.

Who and for how long one should invest in Hybrid Funds?

The investors who are able to afford medium risk should be investing in Hybrid Funds, as the equity component involved in it makes it a little risky investment than Debt Funds.

The ideal time for you to invest in Hybrid Fund to get a satisfactory return is for a medium-term say for 5 years or more. Though the answer to this question mostly depends on you and the goal that you want to achieve.

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