Hybrid funds are classified as follows based on their asset allocation:
Aggressive funds: Hybrid funds that invest a majority in equity are known as equity-oriented funds. It must have at least 65% equity. There are no restrictions on market cap or sector; it can be in any industry. Debt and money market instruments account for 35%.
Conservative funds: A debt-oriented fund that invests primarily in fixed-income instruments, such as bonds, government bonds, and debentures. At least 60% must be debt, and the remaining 40% must be equity.
Arbitrage funds: The concept of arbitrage is to buy in one market and sell in another, leveraging a price difference. In arbitrage funds, stocks are bought on the cash market and sold on the futures market. When there is no arbitrage opportunity, it invests mostly in debt.
Balanced funds: These funds typically have 40-60% equity and debt. Balanced funds can have 40% equity and 60% debt, or any combination in between. Fixed-income instruments allow you to reduce equity-related risks while gaining capital.
Equity savings funds: These hybrid funds invest in stocks, derivatives, and debt instruments to reduce risk. They reduce volatility and deliver higher returns by hedging risky positions with derivatives.
Multi-asset allocation funds: They invest across three asset classes. They also invest in gold to protect against inflation. The fund must have at least 10% in each asset class.
Dynamic asset allocation/Balanced advantage fund: This type of fund gives fund managers a lot of flexibility. Asset allocation can change from 100% equity to 100% debt and any combination in between.
Unit linked insurance plan (ULIP) is another similar option. It combines insurance and investment; policyholders can invest in equity, debt, or a mix of both, along with life insurance. In addition, ULIPs offer flexibility since investors can switch funds based on their risk appetite, market conditions, or changing financial goals.