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
|Rank||Fund Name||1 Yr Return||3 Yr Return||5 Yr Return||Invest|
|1||Principal Hybrid Equity Fund||-4.83%||15.28%||15.84%||Invest|
|2||ICICI Pru Equity and Debt Fund||-5.47%||12.63%||15.88%||Invest|
|3||Mirae Asset Hybrid Equity Fund||-2.54%||12.72%||-||Invest|
|4||ICICI Prudential Balanced Advantage Fund||0.90%||10.08%||12.85%||Invest|
|5||SBI Dynamic Asset Allocation Fund||4.44%||9.86%||-||Invest|
|Honourable Mention||HDFC Balanced Advantage Fund||-6.77%||14.29%||15.87%||Invest|
|6||HDFC Hybrid Equity Fund||-5.64%||11.99%||16.43%||Invest|
|7||Aditya Birla Sun Life Balanced Advantage Fund||-1.17%||11.57%||12.64%||Invest|
|8||Sundaram Equity Hybrid Fund||-0.50%||12.39%||11.45%||Invest|
|9||SBI Equity Hybrid Fund||-3.42%||10.21%||15.35%||Invest|
|10||Canara Robeco Equity Hybrid Fund||-0.92%||11.34%||15.96%||Invest|
Check out the 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 the 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 2019.
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 2-5 percentage points in 3 and 5-year returns. The fund gave 11.08% p.a. returns since its inception in 2000. A SIP of ₹5,000 p.m. in this fund started 5 years ago is worth ₹4.07 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 the 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 the debt portion. The fund has outperformed its category by 2 percentage points in 3 and 5-year returns. The fund gave 14.04% p.a. returns since its inception in 1999. A SIP of ₹5,000 p.m. in this fund started 5 years ago is worth ₹3.90 lakh now.
Mirae Asset Hybrid Equity fund allocates 65-80% of its assets to equity and 20-35% of its assets to debt. The fund positions itself as a low-risk alternative to pure equity schemes. It has a diversified portfolio of strong growth companies at reasonable prices. It has the flexibility to invest across any theme or style. For debt part of the portfolio, the company follows a top-down approach for taking interest rate view and sector allocation view. The fund has outperformed its category by 2-3 percentage points in the 1 and 3-year returns. The fund gave 9.63% return since inception in 2015. A SIP of ₹5,000 p.m. in this fund since its launch is worth ₹2.46 lakhs now.
ICICI Prudential Balanced Advantage Fund is a Hybrid mutual fund belonging to the Balanced Advantage Fund / Dynamic Asset Allocation category. This is one of the largest mutual funds in India with Assets Under Management or AUM of ₹25,663 crore. Also known as ICICI BAF, the fund invests in a mix of stocks and bonds. The fund uses the price to book value ratio or P/B ratio of the market to decide its equity allocation.
The net equity exposure of the fund can range from 30% to 80% with debt making up the rest. The fund invests in equity arbitrage opportunities to ensure that the total equity investment is higher than 65%. It gave 10.61% p.a. returns since its launch in December 2006. ICICI Prudential CIO S. Naren along with Rajat Chandak, Manish Banthia, Ihab Dalwai manage this fund. The funds 3 and 5-year returns are almost in line with its category average. A SIP of ₹5,000 p.m. in this fund started 5 years ago is worth ₹3.79 lakh now.
SBI Dynamic Asset Allocation Fund’s objective is to provide investors with an opportunity to invest in a portfolio which is a mix of equity and equity-related securities and fixed income instruments. The allocation between fixed income and equity instruments will be managed dynamically so as to provide investors with long term capital appreciation. The fund endeavors to meet its objective from asset allocation between asset classes. This approach will help reduce the risk of tracking individual asset classes.
The fund allocates higher weight to the asset class that is relatively favorable under the prevailing market and economic conditions. The optimal allocation between Equity, Debt and Cash will be based on three principles: Momentum, Rate of change in momentum and Exhaustion of momentum. The fund uses derivatives for portfolio rebalancing. The fund gave 7.36% return since inception in 2015. The fund’s 3-year returns are in line with its category returns. A SIP of ₹5,000 p.m. in this fund since its launch is worth ₹2.69 lakhs now.
Honorable Mention: HDFC Balanced Advantage Fund
HDFC Balanced Advantage Fund falls under the Hybrid Aggressive funds’ category. The technical difference is that while Hybrid Aggressive funds have their equity allocation above 65% – 80% at all times, the equity-debt percentage split in a BAF/DAA fund can swing substantially either side based on market conditions. Different asset classes exhibit different risk-return profile and relatively low correlation to each other as compared to investments within the same asset class. The debt-equity mix at any point of time will be a function of interest rates, equity valuations, medium to long term outlook of the asset classes and risk management, etc. The fund gave 18.38% return since inception in 1994. The fund’s 3-year and 5-year returns are 3-4 percentage points higher when compared to its category returns. A SIP of ₹5,000 p.m. in this fund since its launch is worth ₹3.99 lakhs now.
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