What are Hybrid and Balanced Mutual Funds? Why doesn't Goalwise recommend them?


Many of us are familiar with Equity Mutual Funds that invest in stock markets and Debt Mutual Funds that invest in bonds.

Although not as popular, there are some more types of Mutual Funds also:

Hybrid Mutual Funds, as the name suggests, invest in both stocks and bonds. The split between stocks and bonds is decided by the fund manager according to some broad guidelines set out in the Mutual Fund's prospectus.

Balanced Mutual Funds are a type of Hybrid Mutual Funds i.e. they also invest in both stocks and bonds with the extra condition that they will have at least 65% allocated to stocks. This allows them to be taxed like Equity Mutual Funds (tax-free after a year) whereas other Hybrid Mutual Funds that hold less than 65% equity are taxed like Debt Mutual Funds (never tax-free).

At Goalwise, we don't recommend Hybrid Mutual Funds (or Balanced Mutual Funds) for two reasons:

  1. Lack of customisation - The asset allocation i.e. the split between stocks and bond is not under your control. It is decided by the fund manager and everyone gets the same allocation which may not be as per your goals or risk profile. Keeping them separate allows us to customise the asset allocation according to your needs.

  2. Limited choice - Instead of choosing the best Equity Funds and the best Debt Funds separately, we will be forced to choose from a limited menu of Hybrid Funds.

    It is very unlikely that a fund manager would be great at stock picking, bonds picking and also managing asset allocation (how much equity vs how much debt).

    It is like choosing a jack-of-all-trades when you can have the masters of each.

With sophisticated investing platforms like Goalwise which automatically select the best Equity and Debt Mutual Funds for you according to your goals and risk profile even laziness cannot be a reason to select a Hybrid Mutual Fund anymore. :)