What is the difference between hybrid fund and balanced fund?
Investing in mutual funds can get tricky especially if you are first time investor. There are multiple investment schemes, some which seem very similar in nature but are quite different in many aspects. For example, a large cap fund and a ELSS fund both predominantly invest in equity and equity related instruments. However, ELSS comes with a three year lock and tax benefit whereas a large cap fund has no lock in period. It is important to invest in a mutual fund scheme whose investment objective aligns with that of yours. Investing in a mutual fund scheme solely based on its past performance may not be a good idea after all. A mutual fund scheme’s past performance may not determine its current or future performance.
If you want a mix of both equity and debt you may consider investing in hybrid funds. Hybrid funds invest in both equity and debt, but then so do balanced funds. So, what is the difference between these two? This article aims to determine the same.
What are hybrid funds?
Mutual funds are broadly categorized as equity, debt, and hybrid. An equity fund invests a majority of their investible corpus in equity and equity related instruments. Debt funds invest in fixed income securities and money market instruments like government bonds, corporate securities, repo rates etc. to generate capital appreciation.
Hybrid funds are those open ended mutual fund schemes which invest in both equity and debt related instruments for income generation. Some investors who are looking for a mix of equity and debt portfolio can consider investing in hybrid funds. The proportion in which a hybrid fund will invest in these two asset classes is sometimes predetermined and sometimes may interchange over time. Hybrid funds are a great investment option as the equity part of it aims to offer risk adjusted returns whereas the debt part tries to offer protection against falling markets.
What are balanced funds?
Under hybrid funds there are multiple product categories like conservative hybrid fund, aggressive hybrid fund, equity hybrid fund etc. Balanced fund is one such hybrid scheme where the fund invests 40-60 percent of its total assets in both equity and debt. The investment objective of a balanced fund is to offer equity like returns with low investment risk.
Difference between hybrid funds and balanced funds
| Parameters | Hybrid Funds | Balanced Funds |
| Investment type | Hybrid funds invest in both equity and debt asset class. The investment portfolio may vary depending on which hybrid fund we are talking about | A balanced fund must 40-60 percent of its investible corpus in equity as well as in debt |
| Investment objective | The investment objective of hybrid funds is to offer capital appreciation over medium to long term by investing in multiple asset classes | The investment objective of balanced funds is to protect capital by investing in debt and generate capital appreciation by investing in equity |
| Returns | Hybrid funds offer returns less than pure equity funds | Balanced funds aim to deliver better returns than debt funds |
| Classification | Hybrid funds are further classified based on their asset allocation strategy | Balanced funds are available in two investment plans – growth and dividend |
| Fixed returns | Just like any other mutual fund scheme hybrid funds do not guarantee returns | Returns from balanced funds are subject to market risk |
| Ideal for | Investors with a medium to long term investment horizon | Investors with a medium to long term investment horizon |
| Risk profile | The scheme carries a high risk profile | The scheme carries a moderate to high risk profile |
