Know Your Hybrid Funds

Pure play equity and debt funds are staple, but you could also invest in a hybrid fund from the six categories defined under the Securities and Exchange Board of India regulations

- JOYDEEP SEN

Most portfolios are allocated using pure play equity and debt funds. The reason is the contours of pure play funds are better defined. For instance, in a large-cap fund, a minimum 80 per cent has to be in large-cap companies. In a multi-cap fund, minimum 25 per cent has to be in each of large, mid- and small-cap companies. In a corporate bond fund, minimum 80 per cent has to be in instruments rated AAA or AA+.

In contrast, in hybrid funds, the definition is about allocation to equity and debt. The details, such as market cap of equity stocks, or maturity and/or credit rating of bonds, are not defined.

As a consequence, when you invest in a specialised equity or debt fund, you have a better idea of what you are getting into. Having said that, hybrid funds have an appeal. Here, we discuss the six hybrid funds defined in the Securities and Exchange Board of India (Sebi) regulations.

Equity-Oriented Hybrid Funds

Of the six hybrid funds categories defined by Sebi, some are oriented to equity. Aggressive hybrid funds have allocation to equity in the range of 65-80 per cent. There is a regulation to this. It is compulsory to have this allocation to equity. Hence, this category is just one notch below a pure play equity fund. Then there is a category of balanced hybrid funds as well, with equity allocation of 40-60 per cent of the portfolio.

However, as per the Sebi regulation, an asset management company (AMC) can have either aggressive or balanced hybrid fund, but not both. Given that a fund with more than 65 per cent allocation to equity is taxed as equity and investors prefer equity taxation, AMCs have picked aggressive hybrid funds over their balanced counterparts.