Hybrid funds invest in both debt/money market instruments and equities hence they can potentially generate returns from multiple routes. In the case of debt investments, hybrid funds generate income from the coupon rate i.e. interest accrual route, which may be distributed as a dividend or reinvested to make the AUM of the fund grow. Alternately, the fund may buy or sell its investments in the bond market to generate further capital appreciation for the investors. The second route of buying and selling money market investments to generate additional income is usually a less popular route for income generation in case of a hybrid fund.
When it comes to equity investments made by a hybrid fund, the main source of generating returns is through capital appreciation through trading of shares on the stock market. Additionally, a secondary source of income/gains for the fund would be through periodic bonuses or dividends received in lieu of shares held by the mutual fund. Thus hybrid funds have multiple sources of income at their disposal while featuring a relatively lower level of risk as compared to pure equity investments. Thus, hybrid funds such as monthly income plans are often preferred by conservative investors seeking better returns than fixed deposits with a minimum additional level of risk.