Hybrid funds are mutual funds that invest in a mix of different securities such as equities and debt. They combine different investment classes in one scheme. The equity gives your money more growth potential, while debt can make the portfolio less dependent on stock market movements.

Some hybrid funds can also invest in gold, silver or use arbitrage strategies, depending on the category. The Securities and Exchange Board of India (SEBI) classifies hybrid funds into different categories like aggressive or conservative hybrid funds, based on how much they can invest in equity, debt and other assets. This means the risk level can vary quite a lot from one hybrid fund to another.

Hybrid funds may suit you if:

• You want both equity and debt in one fund: You don’t have to manage separate equity and debt investments yourself. A single investment gives you exposure to both.
• You want moderate risk: Some hybrid funds give you a larger debt allocation, which is generally less volatile than pure equity investments.
• You are uncomfortable with a 100% equity portfolio: A fund with some debt exposure can be easier to manage, especially during market falls.
• You want a specific asset allocation: Different hybrid funds allow you to choose a mix of equity and debt based on your risk level and goals.

Let’s assume you invested ₹10,000 in an aggressive hybrid fund. If the scheme has 70% equity and 30% debt, here’s how your money will be split up:

• ₹7,000 goes towards equity investments.
• ₹3,000 goes towards debt investments.

Now, imagine the equity portion falls by 10%. Your ₹7,000 equity investment would fall to ₹6,300. If the debt portion remains at ₹3,000, then the total value would be ₹9,300.

Your overall portfolio would therefore fall by about 7%, rather than 10%.

This is only an example. Debt does not always rise when stocks fall, and the actual allocation and returns depend on the fund.

The key point is that the debt portion can reduce the portfolio’s dependence on equity market movements. It does not guarantee protection from losses.

Hybrid funds come in several types. Each one has a different approach.

• Conservative funds: These funds invest around 10% to 25% in equity and 75% to 90% in debt instruments. They may be suitable if you want limited equity exposure but still want some growth potential.
• Aggressive funds: These funds invest 65% to 80% in equity and 20% to 35% in debt. They are more equity-focused and may be suitable if you want higher growth potential but don’t want a 100% equity portfolio.
• Balanced funds: These funds invest 40% to 60% in equity and 40% to 60% in debt. They sit between conservative and aggressive hybrid funds in terms of equity and debt mix.
• Equity savings funds: These funds combine equity, debt and arbitrage. They must invest at least 65% in equity, with debt and derivatives also part of the strategy.
• Multi-asset allocation funds: These funds invest in at least three asset classes, with a minimum allocation of 10% to each asset class. The portfolio may include equity, debt, gold, silver or other permitted assets.
• Arbitrage funds: Arbitrage funds try to earn from the price difference between cash and futures markets. They invest at least 65% in equity, while using an arbitrage strategy.

• You get multiple asset classes in one fund: Instead of managing separate equity and debt investments, you can get both within a single scheme.
• They can reduce portfolio volatility: A debt allocation can reduce the impact of an equity market fall on the overall portfolio. However, the extent of this benefit depends on the type of hybrid fund you pick.
• Different risk levels are available: You can choose from conservative, balanced, aggressive and other hybrid categories depending on your goals and risk tolerance.
• Rebalancing can happen within the fund: Some hybrid funds maintain a target allocation or actively change the mix between asset classes. This means you don’t have to manage every allocation change yourself.

• You can still incur losses: Hybrid funds are not risk-free. Equity prices can fall, while debt investments can also lose value if interest rates change.
• Returns may be lower than pure equity funds: When the stock market rises sharply, a fund with a large debt allocation may not rise as much as a pure equity fund.
• Debt investments carry their own risks: Corporate bonds can face credit or default risk. Bond prices can also fall when interest rates rise.
• Different hybrid categories behave differently: A conservative hybrid fund cannot be treated the same way as an aggressive hybrid fund or an arbitrage fund. Always check the fund category before investing in a hybrid fund.

Here’s a quick comparison between the four main categories of mutual funds.

Finding the best hybrid mutual funds is not about chasing the highest returns. You should consider these factors while choosing the right hybrid funds to invest in:

• Match the fund to your risk level: First, decide how much equity exposure you are comfortable with. If you want more debt and less equity, conservative funds may be worth exploring. If you are comfortable with more equity exposure, you can look at aggressive funds or other categories.
• Understand the fund’s asset allocation: Check the scheme’s portfolio and see where your money is actually invested. Don’t assume that every hybrid fund has a 50:50 equity-debt split.
• Check the debt portfolio: Review the quality and type of debt securities the fund holds. This can help you understand the credit and interest-rate risks involved.
• Look at long-term performance: Compare the fund’s performance with its benchmark and category over several years. Don’t choose a fund only because it topped the charts over the past year.
• Compare the expense ratio: A low expense ratio can help you keep more of your returns over the long term. Direct plans have lower expense ratios as they don’t include distributors’ commissions.
• Check the performance during market falls: A hybrid fund’s performance during difficult markets can tell you more about its risk than strong bull-market returns.

Ready to invest in a hybrid fund? Start your SIP on Millions in a few simple steps:

• Download the Millions app from the Google Play Store or the iOS App Store.
• Verify your mobile number and complete the KYC process to open your free account.
• Once logged in, navigate to the mutual funds section and search for hybrid funds.
• Select the hybrid scheme based on your financial goals and needs.
• Tap on SIP, select payment frequency and enter the amount you’d like to start investing.
• Pick your preferred SIP debit date, confirm the details and authenticate the payment.

Your SIP is officially rolling! Always start small. Consistency matters more than investing big. Later, as you save more, you can increase the amount or start more SIPs in equity or debt funds for dedicated exposure.