Not everyone wants the full ups and downs of a pure equity fund, and not every goal suits a pure debt fund. Hybrid funds sit in between: one fund that holds a mix of assets and rebalances it for you. The word “hybrid” covers very different funds, though, so it pays to know which kind you are buying.
The seven hybrid categories
SEBI’s categorisation rules define each type by how much it must hold in each asset:
| Category | What it holds | Behaves roughly like |
|---|---|---|
| Conservative hybrid | 10%–25% equity, the rest debt | A debt fund with a little extra growth |
| Balanced hybrid | 40%–60% equity, 40%–60% debt, no arbitrage | A half-and-half portfolio |
| Aggressive hybrid | 65%–80% equity, 20%–35% debt | An equity fund with a cushion |
| Dynamic asset allocation / balanced advantage | Equity anywhere from 0% to 100%, changed by a model or the manager | Varies — more equity when markets look cheap, less when expensive |
| Multi-asset allocation | At least 10% in each of three or more asset classes, such as equity, debt and gold | A diversified mix in one fund |
| Arbitrage | At least 65% in equity arbitrage positions | A low-risk, short-term parking fund |
| Equity savings | At least 65% equity including arbitrage, at least 10% debt | A low-volatility equity-plus-debt mix |
What each kind is good for
Aggressive hybrid
For investors who want mostly equity but a smoother ride. The debt portion cushions falls a little and the fund rebalances automatically. Suitable for long-term goals when a pure equity fund feels too bumpy.
Balanced advantage (dynamic asset allocation)
These funds raise or cut their net equity exposure according to valuations or a market model. They aim to fall less in crashes, and accept that they may rise less in strong rallies. Each fund house uses its own model, so two balanced advantage funds can behave quite differently. Read how the fund decides its equity level before investing.
Multi-asset allocation
One fund holding equity, debt and gold (and sometimes international shares or REITs). Gold has often moved differently from shares, which helps in some bad years for equity. A practical choice for investors who want broad diversification without managing several funds.
Conservative hybrid
Mostly debt with a small equity slice. Used by retirees for regular income or by investors moving out of a fixed deposit who want a little more potential return, with some added risk.
Arbitrage
Arbitrage funds buy a share in the cash market and sell it in the futures market at the same time, earning the small price difference. Returns have usually been close to short-term interest rates, with very low risk. They are popular for parking money for a few months — and, as explained below, they are taxed as equity.
Equity savings
A blend of plain equity, arbitrage and debt. The effective exposure to market moves is lower than the “65% equity” headline suggests, because the arbitrage part is hedged.
How hybrid funds are taxed
Tax depends on the equity share, not on the word “hybrid”:
- 65% or more in Indian equity (aggressive hybrid, arbitrage, equity savings, many balanced advantage funds): taxed as equity — 20% if sold within 12 months; after that, 12.5% on gains above ₹1.25 lakh a year.
- 35% to 65% in equity (balanced hybrid, many multi-asset funds): long-term after 24 months, taxed at 12.5%; short-term gains at your slab rate.
- Less than 35% equity (conservative hybrid): if more than 65% is in debt, gains on units bought after April 2023 are taxed at your slab rate whatever the holding period.
The fund’s documents state its tax treatment. Some balanced advantage funds keep gross equity above 65% using arbitrage specifically so they are taxed as equity. Our tax guide covers the rules in detail.
Questions to ask before choosing one
- How much equity does it hold today, and what is the most and least it can hold?
- How did it behave in a big fall, such as March 2020, compared with a pure equity fund?
- For debt holdings: what is the credit quality and duration?
- How is it taxed, given its equity share?
- What is the expense ratio compared with simply holding an equity fund and a debt fund separately?
Frequently asked questions
Is a hybrid fund safer than an equity fund?
It usually falls less, but it is not “safe”. Aggressive hybrids have fallen 25% to 30% in severe crashes. Choose the type by how much fall you can live with.
Can I build my own hybrid with two funds?
Yes — an equity fund and a debt fund in the ratio you want, rebalanced once a year. That gives full control, but rebalancing is a sale, which can trigger tax. Inside a hybrid fund, rebalancing happens without tax to you.
Not sure which hybrid suits your goal? Message us on WhatsApp, or compare real funds’ histories in our Fund Simulator.
Figures above are illustrations based on assumed rates of return and are not a promise or guarantee of future returns. Mutual fund investments are subject to market risks, read all scheme related documents carefully. WishWiseWealth is an AMFI-registered Mutual Fund Distributor (ARN-188221).