All you need to know about hybrid funds

What’s a hybrid fund?
Hybrid funds are mutual funds that invest in a mix of different asset classes, primarily equity and debt, but also include gold and real estate in some cases. Since the funds are a combination of equity and debt, they offer higher returns than pure debt funds and lower risk than pure equity funds. These offer diversification of assets in a single instrument, thereby providing stability of returns and risk-reward balance. It’s also an easy option for those who want to invest in multiple asset classes for diversification.

Types of hybrid funds
Sebi has classified hybrid funds into seven sub-categories based on the composition of asset classes in the fund.
Aggressive: 65-80% in equity and equity-related instruments + 20-35% in debt instruments.
Conservative: 10-25% in equity and equity-related instruments + 75-90% in debt instruments.
Balanced: 40-60% in equity and equity-related instruments + 40-60% in debt instruments.
Multi-asset allocation: Investment in at least three asset classes, with a minimum allocation of 10% in each asset class.
Dynamic asset allocation or balanced advantage: 0-100% in equity and equity-related instruments + 0-100% in debt instruments.
Arbitrage: These follow the arbitrage strategy, with a minimum of 65% in equity and equity-related instruments.
Equity savings: Minimum 65% in equity and equity-related instruments (including arbitrage) + minimum 10% in debt instruments + derivatives (minimum for hedging to be specified in the scheme information document).

How are hybrid funds taxed?
Different categories of hybrid funds are taxed depending on their equity-debt composition and whether they were bought before or after 1 April 2023.