Best Hybrid or balanced funds are a class of mutual funds that invest across both equity and debt securities to balance the risk-reward ratio. We have covered the following in this article on the best hybrid funds:

1. Introduction to Best Hybrid Funds

Hybrid funds, as the name suggests, invest across both equity and debt securities to constitute a diversified portfolio. Investing in these funds is a better way of diversifying your portfolio rather than separately investing in several individual securities. Hybrid funds are further classified into equity-oriented hybrid and debt-oriented hybrid funds depending on their equity exposure. If equity exposure is more than 65%, then it is said to an equity-oriented hybrid fund. If not, it is a debt-oriented fund.

2. Top 10 Best Hybrid Funds

The table below shows the top-performing hybrid funds based on the past 3-year and 5-year returns:  
Fund 3-Year Returns 5-Year Returns Link
Kotak Asset Allocator Fund Growth 9.30% 10.04% Invest now!
SBI Magnum Medium Duration Fund Regular Growth 9.38% 9.91% Invest now!
Mirae Asset Hybrid Equity Fund -Regular Plan-Growth 4.89% 9.52% Invest now!
Canara Robeco Equity Hybrid Fund Growth 6.93% 9.35% Invest now!
ICICI Prudential Asset Allocator Fund(FOF) Growth 6.52% 9.24% Invest now!
ICICI Prudential Regular Savings Fund Growth 7.23% 8.85% Invest now!
DSP Equity & Bond Fund Growth 4.50% 8.57% Invest now!
Kotak Debt Hybrid Growth 6.04% 8.09% Invest now!
SBI Equity Hybrid Fund Regular Growth 4.59% 8.07% Invest now!
Kotak Equity Hybrid Regular Growth 4.01% 7.99% Invest now!

3. Who Should Invest in Hybrid Funds?

Investing in hybrid funds is suitable for those who are willing to take some risk in exchange for the potential to earn much higher returns than debt funds. Anybody looking to diversify their portfolio should consider investing in these funds. If you are not willing to assume higher levels of risk and are looking to gain exposure to a portfolio dominated by debt securities, then you may invest in debt-oriented hybrid funds. The exposure of these funds towards equity is on the lower side, generally less than 35%. These funds are relatively stabler than equity funds and may provide higher returns than debt funds. If you are looking to gain exposure to an equity-oriented portfolio having some exposure toward debt securities, then you may consider investing in hybrid funds. The debt exposure of these funds is restricted to under 35%. This gives you the benefit of diversification and the presence of debt securities mitigates market volatility to some extent.

4. Taxability of Hybrid Funds

The dividends offered by any mutual fund scheme are added to your overall income and taxed as per the income tax slab you fall under. This method of taxation of dividends is referred to as the classical way of taxing dividends. Until Budget 2020, dividends were made tax-free in the hands of investors as the fund houses paid dividend distribution tax (DDT). The taxation of capital gains of hybrid funds depends on their type. If the fund is debt-oriented, then the fund is taxed like any other debt mutual fund. If it is equity-oriented, then the rules of taxation of equity funds apply. Therefore, it is important to know the fund’s type you are choosing to invest from the tax point of view.

5. Risks Associated With Hybrid Funds

Generally, hybrid funds are regarded as a higher level of risk as compared to a debt fund but lower as compared to an equity fund. The fund manager strives to balance the risk-reward ratio by modifying the composition of the fund’s portfolio by following the prevailing market trend. Hybrid funds carry all the risks that come associated with both equity and debt securities. These funds carry credit risk, interest rate risk, market risk, liquidity risk, concentration risk and volatility risk. All hybrid fund investors automatically assume all these risks on gaining exposure to a hybrid fund.

6. Things to Consider Before Investing in a Hybrid Fund

You have to consider the following points before investing in a hybrid fund: Risk profile You need to assess your risk profile and choose to invest in that hybrid fund whose risk levels are matching yours. Investment horizon If your investment horizon is shorter than five years, then you may consider investing in a debt-oriented hybrid fund. If it is longer than five years, then you may choose to invest in an equity-oriented hybrid fund. Equity-oriented portfolios require longer tenures to mitigate market volatility to a greater extent. The type of hybrid fund Since the rate of taxation of capital gains offered by hybrid funds depends on their type, you should essentially be aware of the type of hybrid fund you are choosing to invest in. This helps in planning your taxes better.

7. Advantages of Investing in Hybrid Funds

The following are some of the advantages of investing in hybrid funds:
  • As these funds invest across both equity and debt securities, it naturally gives you the benefit of diversification.
  • The fund manager modified the composition of the portfolio depending on the market conditions. He tries to reap the best out of both equity and debt segments.
  • These funds are known to provide higher returns than a debt fund while carrying lower levels of risk.
  • First-time equity investors may consider getting started by investing in a hybrid fund. This gives them a controlled exposure to equities.

FAQs (Frequently asked Questions)

As a tax-paying citizen, the Section-80c of the Indian Tax Act allows you some breather –
a deduction of up to 150,000 from your total annual income.
  • Which are the best mutual funds to invest in India?
    You may consider picking the best mutual fund depending on your investment objectives and risk tolerance. You could check the track record of the mutual fund house and the fund manager before investing in the mutual fund. However, you may invest in the mutual fund only if you are comfortable with the investment style of the fund manager.

    You must check the expense ratio before putting your money in the mutual fund. You may find the best mutual funds having a lower expense ratio. However, you must check other important parameters before investing in the mutual fund. You would find the best mutual funds have a lower turnover ratio for the portfolio. You may avoid mutual funds where the fund manager churns the portfolio many times.

    You may pick the best mutual funds depending on your investment horizon. You could invest in equity funds only if you have an investment horizon of three years or more. You may invest in debt funds for a shorter time horizon of under three years. Invest in balanced or hybrid funds only if you have an investment horizon of three to five years.

    You may measure the performance of mutual funds against a benchmark index to select the best mutual funds. For example, you may check the performance of a large-cap fund against the Nifty 50. Compare the performance of the mutual fund against its peers and also take a look at the consistency of performance. Best mutual funds have a consistent track record of outperforming peers and the benchmark index over five years or more.

    You must choose the best mutual fund house with large assets under management (AUM). The fund house may be able to bear sudden redemption pressure if it has large assets under management.
  • How to find the best performing mutual funds in India?
    Best performing equity fund:
    An equity mutual fund may be the best performer in its category if it consistently beats the benchmark index over some time. The best performing equity fund has a lower expense ratio as compared to peers. You may find the best performing mutual funds doing well across market cycles.

    You must check the alpha of the equity fund to identify the best performing mutual fund. It shows the excess return generated by the equity fund above the benchmark index. You can pick the equity fund with a high alpha as compared to the peers.

    You must take a look at the beta of the equity fund. It gives you an idea of the volatility of the fund as compared to the benchmark index. An equity fund with a beta less than one is less volatile as compared to a fund with a beta more than one.

    Take a look at standard deviation which gives you an idea of the volatility of the equity fund. You may find an equity fund with a higher standard deviation to be riskier as compared to a fund with lower standard deviation. You may pick the best performing equity fund based on risk-adjusted returns. Check the Sharpe’s ratio of the equity fund and opt for an equity mutual fund scheme with a higher Sharpe’s ratio which signifies a higher risk-adjusted return.

    Best performing debt fund:
    You may consider picking the best debt funds based on the credit quality of the bonds in the portfolio. Credit rating agencies would assign a credit rating to bond-issuers based on their ability to repay the principal and interest amounts. You must invest in debt funds with AAA-rated bonds in the portfolio.

    It is a safer investment as compared to bonds of a lower rating which may offer a higher interest rate. However, they could default on both principal and interest payments.

    You may select the best performing debt fund based on the expense ratio. You must not pick a debt fund with a high expense ratio. Best debt funds have an excellent track record of performance over three to five years. You may select the best debt fund where the average maturity period matches your investment horizon.

    Best performing hybrid fund:
    You could pick the best performing hybrid fund with a good track record of performance over three to five years. Select a hybrid fund which has beaten the benchmark index and peers over some time.

    You may check the track record of the fund house and the investment style of the fund manager before picking the best performing hybrid fund. Pick a fund house with huge assets under management which can bear the sudden redemption pressure of big investors.

    Select the best performing hybrid fund with a low expense ratio. A high expense ratio may eat up the return from the fund. The best performing hybrid funds must match your investment objectives and risk tolerance. Take a look at the portfolio of conservative hybrid funds. It gives you an idea on the credit quality of bonds in the portfolio.
  • Which is the best way to buy mutual funds in India?
    You may buy mutual funds through cleartax invest. Follow these steps to invest in mutual funds.
    • You must log on to cleartax invest
    • You then select the mutual fund house from the list of fund houses
    • Select the mutual fund scheme based on your investment objectives and risk tolerance and click on Invest now
    • You must select the amount you plan to invest in the mutual fund scheme and the mode as either One Time or Monthly SIP.
    • You must fill up the requisite details such as name, email ID, mobile number and complete the transaction.

    Complete your KYC (Know Your Customer) before investing in a mutual fund scheme. You must visit the website of a KRA (KYC Registration Agency) and create your account. You will have to fill the KYC registration form with details such as your name, email ID, mobile number and so on.

    Upload copies of your self-attested identity proof such as PAN Card and address proof such as passport, driving license or Voter ID along with a passport size photograph at the KYC Registration Agency. You may complete the IPV (In-Person Verification) through a video call to verify your documents against the originals and also your signature.