What are Hybrid Funds? Best Hybrid Funds for 2018-2019
Earlier known as Balanced Funds, Hybrid funds invest both in equity and debt instruments. Some hybrid funds also invest in other assets like gold and real estate. Hybrid or Balanced mutual funds have been very popular among Indian investors. They are suitable for investors seeking good returns at moderate risk. Hybrid funds can be used both for capital appreciation and monthly income. Monthly dividend schemes of hybrid funds are popular among investors. As we covered earlier, SWP in these funds is a good way to get a steady monthly income from mutual funds.
Some of the largest mutual fund schemes in India are Hybrid Funds. HDFC Balanced Advantage Fund, earlier known as HDFC Prudence Fund, is the largest equity-oriented mutual fund scheme in India with assets of over ₹37,000 crores. There are 7 categories of Hybrid funds described below. We have considered Aggressive Hybrid Funds or Equity Hybrid Funds to create the best Hybrid funds list.
Top 10 Hybrid Funds
|Fund Name||1-Year Return||3-Year Return||5-Year Return||Previous Name||Invest|
|Principal Hybrid Equity Fund||13.3%||16.0%||18.1%||Principal Balanced||Invest|
|Reliance Equity Hybrid Fund||9.2%||12.7%||17.8%||Reliance RSF - Balanced||Invest|
|L&T Hybrid Equity Fund||6.2%||12.3%||18.6%||L&T India Prudence||Invest|
|SBI Equity Hybrid Fund||11.8%||11.4%||17.7%||SBI Magnum Balanced||Invest|
|ICICI Prudential Equity & Debt Fund||7.4%||12.7%||18.0%||ICICI Prudential Balanced||Invest|
|Aditya Birla Sun Life Equity Hybrid '95 Fund||6.1%||11.9%||17.2%||Aditya Birla Sun Life Balanced 95||Invest|
|DSP BlackRock Equity & Bond Fund||6.1%||11.9%||16.6%||DSP BlackRock Balanced||Invest|
|UTI Hybrid Equity Fund||7.0%||11.3%||14.9%||UTI Balanced||Invest|
|Canara Robeco Equity Debt Allocation Fund||8.3%||11.6%||17.0%||Canara Robeco Balance||Invest|
|Franklin India Equity Hybrid Fund||7.5%||10.0%||16.2%||Franklin India Balanced||Invest|
Check out details of these top hybrid funds here.
Types of Hybrid Funds
SEBI has defined 7 types of hybrid funds which have described along with examples below. You can read the full SEBI circular here. If you want to just get the essence of the SEBI circular, please refer to our earlier post here.
1. Aggressive Hybrid Funds
Aggressive Hybrid Funds or Equity Hybrid funds have minimum 65% equity exposure. Earlier known as Balanced or Prudence funds, equity hybrid funds are the most popular among all categories of hybrid funds. As per the SEBI guidelines, aggressive hybrid funds have to invest between 65% to 80% in equity and between 20% to 35% in debt instruments. The volatility of these funds is higher than other hybrid funds but lower than pure equity funds.
Investment in Equity Hybrid funds should be done for a duration of 3 or more years. These funds are considered as equity funds for the purpose of taxation. They are suitable both for wealth creation and regular income. The most popular mutual funds in this category are ICICI Prudential Equity & Debt Fund (earlier known as ICICI Prudential Balanced Fund) and SBI Equity Hybrid Fund (earlier known as SBI Magnum Balanced Fund).
2. Dynamic Asset Allocation or Balanced Advantage Funds
This is a relatively new category of hybrid mutual funds. In Dynamic Asset Allocation or Balanced Advantage Funds, the investment in equity and debt is managed dynamically. The equity allocation in these funds is based on the market circumstances at any given moment. The minimum investment in equity and equity arbitrage instruments is 65%. This makes DAA/BAF funds eligible for equity taxation. Due to the use of safer equity arbitrage instruments, the net equity exposure in these funds can be as low as 40%.
Every Balanced Advantage Fund (BAF) or Dynamic fund has an internal process to decide on the equity allocation. The funds use market indicators like Price to Book Value (PBV) and Price to Equity Ratio (P/E Ratio) to arrive at the net equity percentage. Some funds like Motilal Oswal Dynamic Fund have made their formula public. Since SEBI has not put strict rules on equity allocation, it leaves the investment style open to fund managers. For example, ICICI Prudential Balanced Advantage Fund is a moderate risk fund where net equity exposure can go down to 25%. On the other hand, the new HDFC Balanced Advantage Fund is an aggressive fund where the fund manager can take the equity allocation right up to 100%.
3. Equity Savings Funds
Equity Savings Funds are open-ended schemes investing in equity, arbitrage, and debt instruments. These funds have a minimum 65% investment in equity & equity related instruments. This ensures that these funds get taxed like equity mutual funds. However the net equity exposure in equity savings funds is typically between 25% – 35%. These funds use equity arbitrage opportunities to take the total equity allocation to at least 65%. Minimum investment in debt is 10% of total assets. SEBI also requires equity savings funds to state minimum hedged & unhedged equity allocation in their SID.
Equity Savings Funds are a good choice for conservative investors looking for better returns than FD and short term debt funds. The funds have typically returned between 8.5% to 9.0%. HDFC Equity Savings Fund and Kotak Equity Savings Fund are popular funds in this category.
4. Conservative Hybrid Fund
SEBI defines Conservative Hybrid Funds as open ended hybrid schemes investing predominantly in debt instruments. Earlier known as Monthly Income Plan (MIP), these funds are also known as Regular Savings Funds. Conservative hybrid funds invest mostly in debt instruments, between 75% and 90% of total assets. They also invest a small portion, 10% – 25% in equity & equity related instruments.
The ideal investment horizon for Regular Savings Funds is 3 or more years. These funds are taxed like debt funds. The popularity of these MIP funds has waned in the last 4 years. This happened because the holding period to get tax indexation benefit was increased from 1 year to 3 years. They are suitable for conservative investors looking for a monthly income. Some of the popular mutual funds in this category are ICICI Prudential Regular Savings Fund Growth and Aditya Birla Sun Life Regular Savings Fund.
5. Arbitrage Funds
SEBI defines Arbitrage funds as open ended schemes investing in arbitrage opportunities. Arbitrage opportunities emerge because of difference in cash stock market and derivative market. These funds leverage these arbitrage opportunities to generate returns. These funds typically also invest between 20% – 30% of their assets in debt instruments. Arbitrage funds are the lowest risk equity oriented funds since they do not have any unhedged equity exposure. The returns from popular arbitrage funds have been around 6% in the past. Kotak Equity Arbitrage Fund is a popular mutual fund in this category.
6. Multi Asset Allocation Fund
Multi Asset Allocation funds are hybrid funds that invest in at least three asset classes with a minimum allocation of at least 10% each in all three asset classes. Equity and debt are the 2 common asset classes. The third asset class is typically gold or real estate. ICICI Prudential Multi-Asset Fund Growth is the largest fund in this category.
7. Balanced Hybrid Fund
Balanced Hybrid invest between 40% – 60% of their assets each in debt and equity instruments. Since these funds have higher equity allocation but still qualify for debt taxation, this category is not popular. Currently there are no mutual fund schemes in this Balanced Hybrid category.
Why should you invest in Hybrid Funds?
Diversification: As hybrid funds invest in different asset classes they provide diversification benefits to a portfolio.
Dual benefits: Hybrid funds provide dual benefits of long-term growth from equity and stability from debt.
Suitable for all types of investors: Hybrid funds suit a new investor scared of the equity market, a retiree looking for regular income, or an aggressive investor looking for high returns.
Best Hybrid Funds
Upwardly has created the list of best hybrid funds for 2018. We have considered equity hybrid funds to create this list since they are the most popular category of hybrid funds. We will publish best funds from other hybrid categories in future.
Principal Hybrid Equity fund has been the best performing balanced fund in the last 3 years. The fund invests in companies that the manager believes are undervalued. It buys stocks with a long term investment perspective. The fund has outperformed its category by 6% in 1, 3 and 5-year returns. The fund gave 11.6% p.a. returns since its inception in 2000. A SIP of ₹5,000 p.m. in this fund started 5 years ago is worth ₹4.61 lakh now.
Reliance Equity Hybrid Fund aims to maintain a large-cap portfolio with tactical exposure to emerging leaders. It focuses on generating high accrual income through investments in high quality debt instruments with moderate duration. The fund has outperformed its category by 2-6 percentage points in the 1, 3 and 5-year returns. The fund has given 13.9% p.a. returns since its inception in 2005. A SIP of ₹5,000 p.m. in this fund started 5 years ago is worth ₹4.40 lakh now.
L&T Hybrid Equity Fund was earlier known as L&T India Prudence Fund. The fund is managed by L&T Mutual Fund CIO S.N. Lahiri with others. The fund has gathered assets of over ₹10,000 crores in just 7 years from launch showcasing its popularity. The equity portfolio is dominated by large cap stocks. On the debt side, It maintains a high credit quality portfolio without aggressive duration calls. The fund has outperformed its category by 3%-7% and its benchmark by 1% – 4% in 3 and 5-year returns. The fund gave 13.97% (annualized) return since its inception in 2011. A SIP of ₹5,000 p.m. in this fund started 5 years ago is worth ₹4.41 lakh now.
Earlier known as SBI Magnum Balanced fund, SBI Equity Hybrid Fund is a popular fund with assets over ₹20,000 crores. It maintains a steady state 75-25 equity-debt mix. The fund manager invests a part of assets in mid cap stocks to boost returns. In the debt portion, the fund invests both in G-secs and corporate bonds for higher accrual income. The fund has outperformed its category by 2% – 6% in the 1, 3 and 5-year returns. The fund gave 16.07% (annualized) return since its inception in 2005. A SIP of ₹5,000 p.m. in this fund started 5 years ago is worth ₹4.35 lakh now.
With assets of ₹27,000 crore, ICICI Prudential Equity is the second largest equity oriented mutual fund in India. Earlier known as ICICI Prudential Balanced Fund, it is managed by ICICI Pru CIO S. Naren with others. The fund follows a rather conservative investment strategy in both equity and debt. On equity side, the fund predominantly invests in large cap stocks following value investing style. The fund is very conservative about taking on credit risks. Hence, the fund maintains a low profile with debt portion. ICICI Pru Equity and Debt fund has outperformed its category by 1% – 6% in 1, 3 and 5-year returns. The fund gave 14.59% p.a. returns since its inception in 1999. A SIP of ₹5,000 p.m. in this fund started 5 years ago is worth ₹4.37 lakh now.
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