Hybrid funds, a type of mutual fund scheme, are a mix of equity, debt and other asset classes. “Any fund which is a mix of any of the asset classes can be defined as a hybrid fund," said Neeraj Chauhan, chief executive officer of The Financial Mall, a New Delhi-based financial advisory firm.

Hybrid funds can be a mix of equity, debt, international equity and other asset classes like gold, too, and in different proportions. The equity component helps to ride the equity wave while the debt component provides a cushion against extreme market turbulence, said Aditya Bajaj, head of investments at Bankbazaar.com.

The costs of hybrid funds differ from one asset management company to another but on a wider range, it can lie between 1.35% and 1.75%.

Types of hybrid fund

Hybrid funds can be equity or debt-oriented. If 65% or more of the fund’s assets are invested in equity and rest in debt and money market instruments, it’s called an equity-oriented fund and an asset allocation of 60% or more in debt and rest in equity is called a debt-oriented fund, said Bajaj. The debt component of the fund constitutes the investment in fixed-income instruments like government securities, debentures, bonds, treasury bills, etc. and the equity component of the fund consists of equity shares of companies across sectors.

The Securities and Exchange Board of India categorises hybrid funds into six categories: conservative hybrid fund, balanced hybrid fund, aggressive hybrid fund, dynamic asset allocation, multi-asset allocation, arbitrage fund and equity savings.

Who should opt for it?

Hybrid funds are generally considered safer than pure equity funds as returns are stable; which is again higher than pure debt funds, said Bajaj. This makes it an ideal first step for new investors who are looking at investing in the equity markets, Bajaj said. Who should opt for hybrid funds also varies with the different types that comprise it. The kind of hybrid funds where equity and debt component are in equal halves are more suited for investors with moderate risk profile and who have a three to five years investment timeline, said Chauhan. The second category suits reasonably aggressive investors, where equity component is around 65% and above. The third category is for conservative investors, where the equity component is around 30% and rest is comprised of debt and arbitrage.

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