There are three broad classifications of Mutual Funds- Equity, Debt and Hybrid Funds. Typically Equity Funds are good for investors with a high risk appetite, Debt Fund is for the investors who wish to earn higher returns by taking moderate risk and Hybrid Funds are for investors who want the “best of both worlds”. In this article we will tackle the differences between two of these major categories- Equity Mutual Funds and Hybrid Mutual Funds.
Difference between Equity Funds & Hybrid Funds
| Parameters | Equity Funds | Hybrid Funds |
| Degree of Risk | High Risk | Less Risky than Equity |
| Returns | Higher than Debt Funds | Returns may vary |
| Liquidity | High Liquidity (except ELSS) | Less Liquid as compared to Equity Funds |
| Suggested Investment Horizon | Long Term (5 to 7 years at least) | Medium Term (3 to 5 years at least) |
| Suitability | Investors with long-term financial goals and high risk appetite | Investors with medium-term goals and lower risk appetite |
What are Equity Mutual Funds?
Equity Funds are investment schemes which invest their assets in shares/stocks of different companies across market capitalisation to generate higher returns. The fund’s portfolio has a minimum 65% of assets invested in equity & equity-related instruments. These funds are highly risky which is why they have the potential to offer higher returns as compared to hybrid & debt funds.
On the basis of market capitalisation, equity funds are further classified into Large Cap Equity Funds, Small Cap Equity Funds, Mid-Cap Equity Funds and Multi-Cap Equity Funds.
Related Article: Equity Mutual Funds, Features, Advantages and Best Funds
What are Hybrid Mutual Funds?
Mutual Fund schemes investing in a mix of equity & debt securities are known as Hybrid Mutual Funds. By avoiding a concentrated portfolio and employing diversification, Hybrid Funds tend to balance out the market risks. The fund risk depends on what is the investment stance and asset allocation into equity & debt. Such funds are suitable for the investors who are seeking investment options which are less risky and at the same time deliver higher returns than debt funds.
Now, let us indulge in a comparative analysis of basic difference between Equity & Hybrid Mutual Funds:
Which is a better investment option Equity Fund or Hybrid Fund?
All Mutual Funds are subject to market risks but the degree of risk varies for every category depending upon the investment style, portfolio constitution etc. Here is a descriptive differentiation between Equity Mutual Funds and Hybrid Funds:
- Returns
By placing the assets in Large Cap, Small Cap and Mid Cap Companies, Equity Mutual Funds tend to accrue higher returns than Debt Funds. Historical returns of Equity Mutual Funds have shown clear records of delivering inflation beating returns. If you are an investor who is willing to place the bets in riskier instruments and obtain higher returns, equity funds are your suitable investment options.
On the other hand, the returns from Hybrid Mutuals have the potential to beat the returns from Debt Funds. However, there is no guarantee of steady return as the Net Asset Value (NAV) of Hybrid Funds is directly affected by the performance of the securities which are invested in. Debt-oriented Hybrid Funds, as compared to a pure Debt Fund, provides stability of income because of the presence of Equity component in the portfolio.
- Risks
Equity Funds are considered as the riskiest mutual funds because of the direct dependency on market positions. However, if you invest in a Diversified equity fund, the risk factor is balanced. Out of all the types of Equity Mutual Funds, Sectoral & Thematic Funds are the most risky because their portfolio is concentrated. New investors with no knowledge of market fluctuations should invest in Large Cap Equity Funds as they are less affected by market downturns. And, investors with experience in market functionality can invest in Small Cap or Mid Cap Funds to get higher returns.
Hybrid Funds are considered low-risk funds but they are not entirely risk free. The funds which have dominance of Equity allocations are more risky as compared to the ones which invest largely into Debt securities. Debt instruments help in mitigating the risk and also helps in balancing the risk from equity investments.
- Suitability
The suitability of Equity & Hybrid Funds depends on the risk appetite of an investor, the duration for which he/she wants to invest and the familiarity with market fluctuations.
- New investors are reluctant to take risks with their investments. It is suggested that investors who are new to Mutual Funds should invest in Large Cap equity funds which are less affected by market fluctuations. They must not invest in Sectoral/Thematic equity mutual funds as they are the riskiest category of funds
- Investors with low risk appetite should prefer Hybrid Mutual Funds which have predominance of Debt investments. However, if you have good risk tolerance, you can invest in Equity Funds
- Investment Horizon
Investors with a long-term financial goal can invest in Equity Mutual Funds where the suggested investment horizon is at least 5 to 7 years. And, investors with medium term financial goals can invest in Hybrid Funds for at least 3 to 5 years to get good returns (better than debt funds).
In Conclusion
There is no mutual fund which is completely risk-free. Your investment stance and strategy can, however, help you get better results. Some investors prefer analysing only historical returns to judge the future performance of a fund. The past performance of a fund is not indicative of the future performance. Instead, one should examine and scrutinise other factors such as the present market conditions, NAV, Costs Involved, Growth etc. to select the best investment option. Like we just analysed the differences between large cap and small cap funds, every category of funds is different from the other. So, you can track the market movements and understand the working of the fund before you start investing.
Also Read: Difference between Hybrid and Debt Funds | Debt vs Equity Financing