Mutual Fund: Top 10 Best Performing Hybrid Mutual Funds to Invest in FY 2022-2023

What are Hybrid Mutual Funds? 

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 minimise the risk involved.  The main intention of hybrid funds is to balance the ratio of risk-reward and optimising the return on investment. Top hybrid mutual funds invest about 50% to 70% of the portfolio in equities and the rest in debt instruments. Hybrid funds have the potential to generate relatively better returns than debt funds while being less riskier than equity funds.

If the equity exposure of a hybrid fund exceeds 65%, then it is considered as an equity-oriented hybrid fund. If not, it is regarded as a debt-oriented hybrid fund. First-time equity investors may consider hybrid mutual funds as a viable option. Balanced funds are an excellent option for those who want maximum capital appreciation while taking some amount of risk.

Types of Hybrid Mutual funds 

There are many hybrid funds based on their asset allocation. Investors should choose a hybrid fund which suits their risk appetite, investment horizon and investment objective.

1. Aggressive Hybrid Fund- Aggressive hybrid funds are open ended hybrid schemes investing predominantly in equity and equity related instruments which invest between 65% and 80% of its assets in equity and the rest in debt and money market instruments. These funds have the potential to generate relatively better returns due to higher exposure to equity and equity-related instruments than conservative hybrid funds but are more riskier than them. Conservative Hybrid Fund

2. Conservative hybrid funds are open ended hybrid schemes investing predominantly in debt instruments which invest between 75% and 90% of its assets in fixed income generating securities such as Commercial Papers(CPs), Certificate of Deposit(CD), T-bills, corporate bonds and other money market instruments. The rest is invested in equity and equity related instruments. These funds are less volatile than an aggressive hybrid fund and are suitable for risk averse investors

3. Dynamic Asset Allocation Fund- As the name suggests, Dynamic asset allocation fund dynamically invests in both equity and debt depending on the current market conditions based on an internal investment model. This fund is suitable for investors looking for better risk adjusted returns over long term irrespective of market conditions.

4. Multi Asset Allocation Fund-Multi Asset Allocation Fund invests a minimum of 10% of its portfolio in at least 3 asset classes and increase/decrease its allocation according to the current market condition. These funds typically invest in equity, debt and gold related instruments including ETF and such other asset classes as SEBI may prescribe from time to time.

5. Arbitrage Fund- Arbitrage funds work by profiting from the difference in price between 2 markets usually the cash market and the futures market. These funds purchase stocks in the cash market and simultaneously sell it in the futures market. Arbitrage Funds have a minimum of 65% of gross exposure to equity and the rest in debt and money market instruments which is done on a tactical basis.

6. Equity Savings Fund-  Equity savings fund invests in equity, debt and arbitrage opportunities in the cash and derivative segment of the equity market. This fund aims to generate income by investing in arbitrage opportunities with considerable exposure towards equity and can help in long term wealth generation.

Advantages of Investing in Balanced Funds

Best balanced mutual funds offer diversification in the form of a single mutual fund. Hence, investors need to analyse and select a bouquet of the right funds carefully. A professionally trained and experienced fund manager does this job for the investor. A calculated combination of debt and equity components makes the funds less vulnerable to market volatility. The equity components of the fund are aimed at generating capital appreciation and their debt components serve as securities to shield the investment from unforeseen market corrections.

Taxation of Hybrid Funds

The dividends offered by any mutual fund are now added to your overall income and taxed at your income tax slab rate. The rate of taxation of capital gains offered by hybrid funds depends on the equity exposure of the fund. Any unit of an equity oriented fund if it is held for a period of 12 months or less will be considered as “Short-term capital asset” and if held for more than period of 12 months, will be considered as Long term capital asset. In respect of all other unit of any mutual fund scheme, the same will be treated as short term capital asset if it is held by unit holder for 36 months or less and the same will be treated as Long term capital asset if it is held for more than 36 months.

All the mutual funds with an equity exposure of 65% or more on an average are treated as equity asset class for taxation purpose. So the short-term Capital Gains meaning the gains booked with one year of the equity-oriented balance are taxed at 15%. If these funds are held for a period more than 12 months, their long-term capital gains are taxed at 10% if the gains booked exceed Rs.1 lakh (as per the latest budget of 2018). For debt oriented Hybrid Funds tax is 20% with indexation benefit as any other debt instrument if holding is for 3 years or above. Short term is taxed at marginal rate of tax (as per tax slab).

Top 10 Hybrid Mutual Funds

The table below shows the best-performing hybrid of balanced funds based on the last 3-year and 5-year returns: