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Choosing between equity, debt, or hybrid schemes for investment

3 min read
Hybrid Mutual Fund: How To Pick Right Hybrid Fund?

There are three main types of mutual funds: equity funds, debt funds, and hybrid funds. Equity funds invest in stocks, which offer the potential for high returns but also carry higher risk. Debt funds invest in bonds and other fixed-income securities, which offer lower returns but are also lower risk. Hybrid funds invest in a mix of stocks and bonds, offering a balance of risk and return. Read on to find out more about choosing among them.

Equity funds

Equity or equity-oriented schemes primarily invest in stocks of companies across market capitalizations and sectors. They aim to generate higher inflation-adjusted returns over the long run by investing in shares that can appreciate in value over time. However, equities carry higher volatility and risk, especially over the short term. Equity schemes are suitable for investors with a high risk appetite and an investment horizon of at least 5-7 years. Some popular equity scheme categories in India include large cap, mid cap, small cap, sectoral, and thematic funds.

Debt funds

Debt or fixed income schemes invest predominantly in fixed income instruments like bonds, government securities, money market instruments, and certificates of deposit. They provide lower volatility and steady returns through regular interest payments and capital appreciation of debt assets. Debt funds suit investors looking for stable income and principal protection but lower capital growth. They are ideal for medium to short term financial goals of 1-3 years. Leading debt fund categories in India include liquid, ultra short duration, short duration, medium duration, long duration, dynamic bond, corporate bond, banking and PSU debt funds.

Hybrid funds

Hybrid schemes invest in a mix of equities and debt in varying proportions based on their mandate. They aim to balance risk and return by allocating dynamically between the two asset classes within defined limits. Equity allocation is capped at 25% for conservative hybrid funds, 25-50% for balanced advantage funds, and 50-75% for aggressive hybrid schemes. Hybrid funds are appropriate for investors wanting to participate in equity upside while limiting downside risk through debt. They serve goals with a 3–5-year horizon. Popular hybrid categories in India include arbitrage, balanced advantage, dynamic asset allocation, multi asset allocation, and equity savings funds.

Factor in investment goals, time horizon, and risk appetite

When choosing between the three fund types, consider your investment objectives, time frame, and risk tolerance. Equity schemes align with long term growth needs like retirement, children’s education, or wealth creation. Debt funds match short to medium term needs like emergency corpus, down payment for a house, or a holiday. Hybrid schemes bridge the gap well for moderately aggressive investors saving for financial priorities 3-5 years away. Also, assess how much volatility you can withstand before investing predominantly in equities.

Diversify across categories and fund houses

Build your portfolio by diversifying across equity, debt, and hybrid schemes rather than sticking to just one type. Blend schemes from categories like multi cap funds, banking and PSU debt funds, dynamic asset allocation funds, etc. to benefit from their varied investment mandates. Additionally, diversify across at least 2-3 mutual fund houses to mitigate company or scheme-specific risks. Maintain separate portfolios for strategic long term investments and tactical short term goals.


While investing across categories, analyze funds on parameters like long term performance across market cycles, risk-adjusted returns, expense ratios, portfolio concentration, manager experience, and consistency in meeting categories. Choose funds with prudent strategies to limit downside risk in line with their mandate. Prefer funds with reasonable expenses and proven execution through experienced fund management teams.

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