Balanced hybrid funds: Combining growth potential and stability

When it comes to investing, many people think that they have to make a choice between risk and stability. But investing doesn’t have to be about either going all-out or being conservative —it’s can also be about finding the right mix for your goals and comfort level.

That’s where balanced hybrid funds come into the picture. These funds invest in both equity and debt instruments, offering a middle ground that can appeal to combine the growth potential of stocks with the relative stability of bonds and other fixed-income investments.

In this article, we’ll walk through what balanced hybrid funds are, how they function, their potential benefits, and key tax considerations—so you can decide if they align with your investment strategy.

• Table of contents

• Understanding balanced hybrid funds
• What are balanced funds –– hybrid funds vs. advantage funds
• Functions of balanced mutual funds
• Features of a balanced hybrid fund
• Process to invest in balanced hybrid funds
• Reasons to invest in a balanced hybrid mutual fund
• Taxation rules of balanced hybrid mutual funds

Understanding balanced hybrid funds

Balanced hybrid funds aim to create a diversified portfolio by investing in both equity (stocks) and debt (bonds) and are spread almost evenly between the two. As per regulatory norms, they must allocate 40% to 60% of their portfolio to equities and 40% to 60% to debt instruments. Their main objective is to balance risk and reward. Since equity offers long-term growth potential and debt offers relative stability and risk management, these funds allocate funds to both asset classes.

Also Read: Hybrid Funds: Asset Allocation Strategy

What are balanced funds hybrid funds vs. advantage funds

Balanced hybrid funds follow a fixed asset allocation approach. However, another category that may sound similar to balanced hybrid funds is balanced advantage funds.

Balanced advantaged funds are different as they have the flexibility to allocate investment between stocks (equity) and bonds (debt) based on market conditions. When the stock market is bullish, these funds may choose to invest more in stocks and when the market is volatile, they may invest more in debt investments for relative stability. Therefore, unlike traditional balanced hybrid funds, balanced advantage funds don’t have fixed limits on how much they can invest in each asset type, allowing them to switch freely for better return potential or risk management.

In this article, we focus on balanced hybrid funds.

Functions of balanced mutual funds

The main objective of a hybrid fund is to provide investors with relative stability as well as the potential for their money to grow over time. And this happens when a hybrid fund invests in a mix of stocks (equity) and bonds (debt). The fund manager decides how much to invest in each asset class based on the fund’s strategy and market conditions. However, as per regulatory guidelines, they need to maintain a minimum allocation of 40% to each asset class at all times.

Features of a balanced hybrid fund

• Risk-adjusted return potential: Balanced funds help reduce market volatility by spreading investments across asset classes.
• Diversification: They offer a mix of equity and debt to create a balanced investment portfolio.
• Professional fund management: Experts manage the investments, making strategic changes based on market movements within the scheme allocation mandate.
• Regular income potential: The debt portion offers the potential for relatively stable income, making these funds suitable for more conservative investors.
• Growth potential: The equity portion offers long-term capital appreciation potential.

Process to invest in balanced hybrid funds

Know your investment target

Identifying a goal is the primary step.

Know your risk appetite

After investment goals, you need to assess your risk tolerance levels. Since these funds have some equity exposure, you need to be able to stomach a degree of volatility.

Choose a fund house

Conduct proper research on various balanced hybrid funds and consider factors like past performance*, expertise of fund manager and asset allocation strategy to choose an asset management company.

*Past performance may or may not be sustained in future.

Decide on investment mode

Investors can opt for a lumpsum investment or a Systematic Investment Plan (SIP).

Invest through a reliable platform

Invest online or offline directly with the AMC or through a registered mutual fund distributor.

Reasons to invest in a balanced hybrid mutual fund

Balanced hybrid mutual funds offer the following benefits to investors:

• Dual benefits: The funds offer a balance between relative stability and long-term growth potential.
• Automatic rebalancing: Fund managers adjust the equity-debt mix as needed to maintain the strategic allocation.

Taxation rules of balanced hybrid mutual funds

Balanced hybrid mutual funds are taxed at the following rate:

• Short-term capital gains tax: As per prevailing income tax slab
• Long-term capital gains tax: 12.5%

Also Read: Balanced fund and balanced advantage fund

Conclusion

Balanced hybrid funds can be a suitable investment option for individuals looking the potential for relatively stable returns over time by offering a mix of equity and debt investments. They can be suitable for investors who do not want some exposure to equity assets but do not want the associated high risk.

FAQs:

Are hybrid funds a good investment?

Hybrid funds can be a suitable investment for those looking to balance risk and return. However, those who have a high risk appetite may find equity-oriented funds more suitable for long-term wealth building potential. Conversely, investors who do not want any equity exposure may find debt funds more suitable.

Which is better: hybrid or equity fund?

It depends on the investor’s risk appetite. Hybrid funds are suitable for moderate risk investors, whereas equity funds may be preferable for aggressive investors who can withstand higher volatility in exchange for higher growth potential in the long term.

What are the advantages of investing in balanced hybrid funds?

• Diversification across equity and debt
• Mitigated market volatility
• Potential for relatively steady returns
• Professional management

Are balanced hybrid funds suitable for risk-averse investors?

While investors who want minimum risk may find short-term debt funds more suitable, balanced hybrid funds may be suitable for investors who can tolerate some volatility but still want a relatively stable portfolio.

How are balanced hybrid funds taxed?

Balanced hybrid funds are taxed as per their holding period. Short-term capital gains are taxed as per the investor’s applicable slab rates while long-term capital gains are taxed at 12.5%.