Hybrid Mutual Funds: The Seven Types, How They Are Taxed and How They Compare

What is a hybrid mutual fund?

A hybrid fund invests in more than one kind of asset, usually shares and debt, and sometimes gold, silver or other assets, in one fund. SEBI sorts hybrid funds into seven categories by how much they must or may hold of each, and a fund house can offer only one fund in each category.

SEBI revised the categories in February 2026, and existing funds had until August 2026 to comply. The main changes for hybrid funds: money not needed for a fund’s core mix may now go into gold and silver ETFs, exchange-traded commodity derivatives and InvITs (not in arbitrage funds); equity savings funds must keep their unhedged equity between 15% and 40% of assets; and balanced hybrid and aggressive hybrid funds became separate categories, so one fund house can now offer both.

The point is to get some of the growth of shares with smaller falls, without having to rebalance between funds yourself. When the fund shifts money between assets, you pay no tax on that move.

The seven types of hybrid fund

Aggressive hybrid funds

65%–80% equity, 20%–35% debt. Mostly shares, with a debt cushion. It behaves like a slightly calmer equity fund and is usually taxed as one.

Balanced advantage (dynamic asset allocation) funds

Equity and debt, mix changed actively. The fund moves money between shares and debt, usually by a model based on market valuations: more equity when shares look cheap, less when they look expensive. Many use hedged shares to stay above 65% equity for tax, so their real market exposure can be much lower than that.

Multi asset allocation funds

At least 10% in each of three asset classes. Usually shares, debt, and gold or silver. Above the minimums each fund sets its own mix, so funds in this category differ a lot in risk and in tax treatment: two of the largest are taxed differently. Every multi asset allocation fund compared.

Balanced hybrid funds

40%–60% equity, 40%–60% debt, no arbitrage. An even split between shares and debt. Arbitrage is not allowed, so it cannot reach 65% equity, and with at most 60% in debt it is not taxed as a debt fund either. Until 2026 a fund house could offer either this or an aggressive hybrid fund; SEBI’s new rules made them separate categories, so few balanced hybrid funds exist yet.

Equity savings funds

At least 65% equity, of which 15%–40% of assets unhedged; at least 10% debt. A mix of shares held outright, arbitrage positions and debt. Since 2026 SEBI caps the unhedged part, the shares that move with the market, at 40% of assets, so it is far steadier than an equity fund, and it is taxed as equity. Every equity savings fund compared.

Conservative hybrid funds

10%–25% equity, 75%–90% debt. Mostly debt, with a small share of equity for extra return. With more than 65% in debt, it is taxed like a debt fund.

Arbitrage funds

At least 65% equity, all of it hedged. Shares bought with an equal futures sale, so market moves cancel out. Returns follow short-term interest rates, close to a liquid fund’s, taxed as equity. Every arbitrage fund compared.

How hybrid funds are taxed

Under the Income-tax Act, 2025, which applies from 1 April 2026, a hybrid fund is taxed by what it holds, which puts it in one of three groups:

Equity-oriented: at least 65% in listed Indian shares

Aggressive hybrid, equity savings and arbitrage funds, and many balanced advantage funds, are run to stay above this level, counting hedged shares, on average over the year (section 198). Gains on units held 12 months or less are taxed at 20%; held longer, long-term gains above ₹1.25 lakh a year (counted with your other equity gains) are taxed at 12.5%.

Debt-oriented: more than 65% in debt and money market instruments

Conservative hybrid funds, which must keep 75% to 90% in debt, fall here. Gains on units bought on or after 1 April 2023 are taxed at your slab rate however long you hold them (section 76).

Everything in between

Balanced hybrid funds, and multi asset funds that hold less than 65% in listed Indian shares, fall here. Gains on units held more than 24 months are long-term and taxed at 12.5% without indexation (section 197); held 24 months or less, they are taxed at your slab rate.

Only listed shares of Indian companies count toward the 65% equity test (section 198). Gold and silver ETFs, REITs, InvITs and foreign shares do not, even where SEBI counts some of them as equity for the fund’s own category rules.

The scheme information document and the fund house’s tax note state each fund’s treatment, and it can change if the fund’s mix changes. Surcharge, where it applies, and 4% cess come on top. For resident investors there is no TDS on capital gains; dividend (IDCW) payouts above ₹10,000 in a year have 10% tax deducted. Tax rules change; check your own case with a tax adviser.

Which type of hybrid fund suits which need

• Money for a few months, taxed as equity: arbitrage funds. Compare them with liquid funds on tax.
• Steadier than equity for a one-to-three-year horizon: equity savings or conservative hybrid funds; they differ mainly in tax treatment.
• A single core fund for a moderate-risk investor: balanced advantage or multi asset allocation funds.
• Mostly equity with a cushion: aggressive hybrid funds.

This is general information, not advice for your situation; the right mix depends on your goals, other holdings and tax rate.

How to choose a hybrid fund

• Look at the unhedged equity: the factsheet shows how much of the fund moves with the market. Two funds with 65% "equity" can carry very different risk.
• Check the tax treatment: the scheme document states it. It matters as much as the return.
• Direct plan: the same portfolio for a lower expense ratio. See direct vs regular plans and how the expense ratio works.
• Compare within a category: comparing an arbitrage fund with an aggressive hybrid fund on past returns says little; compare each with others of its type.
• Count what you already hold: a hybrid fund adds to the shares and debt in your other funds. Link your funds to see your overall mix.