Important Facts For Prelims
Hybrid Mutual Funds
- 11 Dec 2025
- 6 min read
Why in News?
As equity markets touch new highs, hybrid mutual fund schemes are gaining popularity among investors. Wealth managers are increasingly recommending these funds, especially for investors who find it difficult to rebalance investments on their own.
What are the Hybrid Mutual Funds?
- About: Hybrid mutual funds are mutual fund schemes that invest in more than one asset class, mainly equity (stocks) and debt (bonds), and in some cases gold, REITs (Real Estate Investment Trusts) and InvITs (Infrastructure Investment Trusts).
- Their primary objective is to provide a balanced mix of growth and stability by distributing investments across different assets.
- They are also known as asset allocation funds because they follow a pre-decided investment pattern.
- Working Mechanism: Hybrid funds follow a fixed or flexible mix of investments. A part of the money is put into equity for growth, while the rest goes into debt or other assets for safety.
- The fund manager regularly rebalances the portfolio to keep this mix intact, so the risk stays under control without any effort from the investor.
- Significance: Hybrid funds are preferred because they spread risk across different assets, show lower ups and downs than pure equity funds, and give more stable returns.
- Tax Benefits: In traditional debt mutual funds or direct investments in bonds or deposits, the income earned is taxed according to the investor's tax slab. This can be as high as 30% for those in the higher tax brackets.
- Hybrid funds with over 65% in equity (or a mix of equity and arbitrage) are considered "equity funds" for tax purposes. The debt portion in such funds benefits from long-term capital gains (LTCG) tax rates.
- This means any profits from stocks (if held for more than a year) are taxed at a lower rate than profits from bonds or other investments.
- This makes hybrid funds tax-efficient compared to regular debt investments.
- Hybrid funds with over 65% in equity (or a mix of equity and arbitrage) are considered "equity funds" for tax purposes. The debt portion in such funds benefits from long-term capital gains (LTCG) tax rates.
Major Types of Hybrid Mutual Funds
|
Type of Fund |
Description |
|
Equity Savings Fund |
Invests a small portion in equity (10–25%) and the rest in debt and arbitrage for stable, low-risk returns |
|
Balanced Hybrid Fund |
Allocates 40–60% each to equity and debt to balance growth and stability |
|
Aggressive Hybrid Fund |
Invests 65–80% in equity and the rest in debt for higher growth with higher risk |
|
Dynamic Asset Allocation / Balanced Advantage Fund |
Shifts between equity and debt based on market conditions and valuations |
|
Multi-Asset Allocation Fund |
Invests in at least three asset classes such as equity, debt, and gold for wider diversification |
Frequently Asked Questions (FAQs)
Q. What are hybrid mutual funds?
Hybrid mutual funds invest in more than one asset class, mainly equity and debt, to provide a balanced risk-return profile.
Q. Why are hybrid funds considered tax-efficient?
Hybrid funds with over 65% equity exposure are taxed as equity funds, attracting lower LTCG tax (12.5%) compared to debt instruments.
Q. What is the working mechanism of hybrid mutual funds?
They follow a fixed or flexible asset mix and are regularly rebalanced by the fund manager to control risk automatically.
Summary
- Hybrid mutual funds are becoming popular as equity markets reach new highs, offering automatic asset allocation for investors who find it difficult to rebalance portfolios themselves.
- These funds invest across multiple asset classes—mainly equity and debt, and sometimes gold or REITs—to provide a balanced mix of growth and stability.
- Hybrid funds are considered tax-efficient, as schemes with over 65% equity exposure are taxed like equity funds, giving lower long-term capital gains tax compared to debt instruments.
- Fund managers regularly rebalance the portfolio to maintain the pre-set asset allocation, helping investors manage risk without active involvement.
UPSC Civil Services Examination, Previous Year Questions (PYQs)
Prelims
Q. In the context of finance, the term ‘beta’ refers to (2023)
a) the process of simultaneous buying and selling of an asset from different platforms.
b) an investment strategy of a portfolio manager to balance risk versus reward
c) a type of systemic risk that arises where perfect hedging is not possible
d) a numeric value that measures the fluctuations of a stock to changes in the overall stock market
Ans: d
