hybrid funds: Why are hybrid funds gaining traction as equity markets hit new highs?

As equity markets scale new highs, mutual fund schemes structured to manage money across assets like stocks, bonds, gold and investment trusts are gaining popularity. For investors who can’t adjust allocations on their own, wealth managers recommend hybrid funds, which offer the twin benefits of automatic asset allocation and tax efficiency.

WHAT ARE HYBRID FUNDS?

Hybrid funds are a type of mutual fund scheme that invests in multiple asset classes, most commonly a mix of stocks and bonds, or stocks, bonds, REITs, and precious metals. Since most of them work on a pre-decided asset allocation, they are also referred to as asset allocation funds

WHAT ARE THE VARIOUS TYPES OF HYBRID FUNDS?
The various categories of hybrid funds include:
a) Equity Savings Funds: Invest 10–25% of the portfolio in equity, while the remaining portion is placed in a combination of debt securities and arbitrage strategies. This category suits investors with a low-to-moderate risk profile, seeking relatively stable returns with limited equity exposure.
b) Balanced Hybrid Funds: Allocate 40–60% each to equity and debt. They are suitable for investors with a moderate risk profile, looking for a balance between equity-driven upsides and lower portfolio volatility driven by bonds.
c) Aggressive Hybrid Funds: Invest 65–80% in equity and 20–35% in debt. This is suited for investors with a higher risk profile, comfortable with equity volatility.

d) Dynamic Asset Allocation / Balanced Advantage Funds: Have the flexibility to invest 30% to 100% in equity, with the rest in debt and arbitrage, depending on share valuations and market indicators. Best suited for those with a moderate risk profile, who prefer active rebalancing of their portfolios.
e) Multi-Asset Allocation Funds: Invest a minimum of 10% each in equity, debt, and gold, offering diversification across asset classes. Suitable for investors who want fund managers to allocate money across assets

WHY ARE HYBRID FUNDS TERMED TAX-EFFICIENT?
If an investor allocates money to a debt mutual fund or a direct bond or deposit, the income earned would be taxed in line with his tax slab. This means those in higher tax brackets may end up paying 30% tax. However, hybrid funds with more than 65% in equity or a mix of equity and arbitrage are treated as equity funds for taxation. The 25–35% debt component in such schemes enjoys the benefit of long-term capital gains, taxed at 12.5% if held for more than a year.HOW DO HYBRID FUNDS ALLOCATE ASSETS?
Some investors struggle to manage asset allocation on their own or cannot hire a financial planner. Hybrid funds solve this by following a pre-decided asset allocation and rebalance it regularly. For example, an aggressive hybrid fund has 65–75% in equity with the balance in fixed income. If the market rises sharply and the equity component reaches 80%, the fund manager will sell equity and buy debt to bring it back to the original allocation — and no action is needed from the investor’s end.