Hybrid Funds are mutual fund schemes which invest in more than one asset class i.e. equity, debt and other asset classes depending on the investment objective of the scheme. These funds invest in a mix of different asset classes to diversify the portfolio with an aim to minimize the risk involved.

Hybrid funds invest in both debt and equity instruments to achieve diversification and avoid the concentration risk. A perfect blend of the two offers higher returns than a regular debt fund while not being as risky as equity funds. The choice of a hybrid fund depends on your risk preferences and investment objective.

Types of Hybrid Funds

• Equity-oriented hybrid funds If the fund manager invests more than 65% of the fund’s assets in equity and the rest in debt and money market instruments, then it’s called an equity-oriented fund. The equity component of the fund comprises of equity shares of companies across industries such as FMCG, finance, healthcare, real estate, automobile, and so on.
• Debt-oriented balanced funds A hybrid fund is termed as a debt-oriented fund if the fund manager allocates more than 65% towards debt instruments. The debt component of the fund constitutes the investment in fixed-income havens such as government securities, debentures, bonds, treasury bills, and so on. For the sake of liquidity, some part of the fund would also be invested in cash and cash equivalents.
• Monthly Income Plans These are hybrid funds that invest predominantly in debt instruments. A monthly income plan (MIP) would generally have 15-20% exposure to equities. This would allow it to generate higher returns than regular debt funds. MIPs provide regular income to the investor in the form of dividends. Investors can choose the frequency of dividends payout; it can be monthly, quarterly, half-yearly, or annually. MIPs also come with the growth option – they let the investments grow in the fund’s corpus. Hence, an MIP is not a small monthly income investment. Do not let the name mislead you. They are hybrid funds that invest mostly in debt and some amount of equities.
• Arbitrage Funds An arbitrage fund manager tries to maximize returns by buying the stock at a lower price in one market. He then sells it at a higher price in another market. However, arbitrage opportunities are not always available quickly. In the absence of arbitrage opportunities, these funds might stick to debt instruments or cash. By design, arbitrage funds are relatively safer, like most debt funds. But its long-term capital gains are taxable like that of any equity fund.