Fund Types · Chapter 8 / 35
Hybrid funds — Aggressive, Conservative, Dynamic, Balanced Advantage
Equity-and-debt blends with different allocation rules. The right pick depends on the volatility you can stomach.
Hybrid funds blend equity and debt in a single scheme. SEBI's October 2017 categorisation defined six hybrid buckets, each with explicit allocation rules.
The six categories
| Category | Equity allocation | Tax treatment |
|---|---|---|
| Conservative Hybrid | 10-25% | Debt-fund rules |
| Balanced Hybrid | 40-60% | Non-equity (case-by-case under FY26 rules) |
| Aggressive Hybrid | 65-80% | Equity-fund rules |
| Dynamic Asset Allocation (Balanced Advantage) | 0-100%, model-driven | Usually equity (if 65%+ avg domestic equity) |
| Multi-Asset Allocation | 3 asset classes, 10%+ each | Depends on actual composition |
| Arbitrage | 65%+ equity (cash-future arbitrage) | Equity-fund rules |
Aggressive Hybrid (65-80% equity)
Often the entry point for investors stepping up from pure debt to equity. The 20-35% debt cushion meaningfully reduces drawdowns vs pure equity. Tax treatment is "equity" (because ≥ 65% in Indian equity), so LTCG at 12.5%.
Conservative Hybrid (10-25% equity)
Largely a debt fund with a small equity kicker. Post-Finance Act 2023, taxation is slab-rate for new units (debt-fund rules) — a meaningful disadvantage compared to its pre-2023 indexation-based regime.
Dynamic Asset Allocation / Balanced Advantage
The most interesting category for many investors. The fund flexes between equity and debt based on a valuation model (typically P/E, P/B, or similar). When markets look expensive, equity allocation drops; when cheap, it rises. The rebalancing happens inside the fund — no taxable event for the investor.
If the rolling 12-month equity allocation averages ≥ 65%, the fund is taxed as equity. Most Balanced Advantage funds aim to stay in equity-tax territory.
Multi-Asset Allocation
Must hold at least 10% each in 3 asset classes (typically equity, debt, gold). The tax treatment depends on the actual portfolio composition at the time of sale.
Arbitrage
A specialised hybrid — uses cash-future arbitrage to deliver near-debt returns with equity-fund taxation. Popular as a tax-efficient liquidity bucket.
When hybrid funds make sense
- First step into equity for a debt-only investor.
- Mid-term goal (3-5 years) requiring some growth without full equity volatility.
- Simplifying — one fund instead of an equity + debt pair to rebalance.
- Tax-efficient parking when arbitrage funds suit the holding-period plan.
Sources
- SEBI — Categorisation and Rationalisation of Mutual Fund Schemes · accessed Jun 2026
- AMFI — Hybrid Funds Investor Education · accessed Jun 2026