Hybrid funds
Schemes that mix shares and debt: SEBI's seven categories, the 65% tax test, and what none of them assures
Rules as on 12 October 2026. Industry figures as on 31 August 2026
Verified 12 October 2026
For training and education only. Not investment advice.
Trainer notes
Ask: a client wants 'a balanced fund'. How much of it is in shares? Take answers. Most will say half. Keep them for slide 3; the honest answer is that it depends on the category.
'Hybrid' says a fund mixes assets. The category says how much of each.
SEBI sorts hybrid schemes into seven categories. Each has its own rule for how much goes into shares, debt and other assets. Start from the category, not the name.
Trainer notes
A hybrid fund holds more than one asset class in a single scheme, mainly equity (shares) and debt (bonds and similar instruments). Equity can be as low as 10% in a Conservative Hybrid, while an Arbitrage Fund holds at least 65%, so two 'hybrid funds' can behave very differently.
Why 'balanced fund' is an old label
Before October 2017
'Balanced fund' had no fixed meaning. A 2018 report says some such funds held up to 75% in equity and some up to 50%.
Balanced Hybrid Fund
A SEBI category today: 40% to 60% in equity and 40% to 60% in debt. Arbitrage is not permitted in it.
Balanced Advantage
The Balanced Advantage Fund is a different category, also called Dynamic Asset Allocation. Its mix changes over time, with no fixed range.
Take-away: Ask which SEBI category a fund is in. The category, not the word 'balanced', fixes the mix.
Sources: SEBI Master Circular for Mutual Funds, 20 Mar 2026, para 3.8.3; MyMoneySage, 17 Jul 2018 (secondary, for practice before 2017).
Trainer notes
Return to the opening question. SEBI first standardised scheme categories by its circular of 6 October 2017. After it, most of the older equity-heavy balanced funds moved into the Aggressive Hybrid category (65% to 80% in equity). No category today is called simply 'Balanced Fund'. A scheme's name must now be the same as its category.
Three categories with a fixed range
| Lowest equity allowed (%) | Highest equity allowed (%) | |
|---|---|---|
| Conservative Hybrid | 10 | 25 |
| Balanced Hybrid | 40 | 60 |
| Aggressive Hybrid | 65 | 80 |
Read the chart
- Each pair of bars shows the lowest and highest share of equity SEBI allows. The rest is debt.
- Conservative Hybrid is mostly debt: 75% to 90%. Aggressive Hybrid is mostly equity, with 20% to 35% in debt.
- Balanced Hybrid holds 40% to 60% in each, and may not use arbitrage.
Source: SEBI Master Circular for Mutual Funds, 20 Mar 2026, para 3.8.3 (Hybrid Schemes).
Trainer notes
'Equity' here means equity and equity-related instruments, as a percentage of the scheme's total assets. The more equity a hybrid holds, the more its value moves with the share market. The chart shows rules, not returns. SEBI lets hybrid schemes put any residual portion in InvITs (not arbitrage funds), exchange-traded commodity derivatives, and gold and silver ETFs, within ceilings; Balanced Hybrid is described as equity and debt only.
The other four categories
| Category | What SEBI requires | In plain words |
|---|---|---|
| Balanced Advantage / Dynamic Asset Allocation | Equity and debt, managed dynamically. No fixed range. | The fund changes the mix over time. Its offer document says how. |
| Multi Asset Allocation | At least three asset classes, with at least 10% in each. | For example shares, debt and gold. Foreign securities do not count as a separate class. |
| Arbitrage | At least 65% in equity, following an arbitrage strategy. | It buys a share and sells that share's futures, so price moves largely cancel out. |
| Equity Savings | At least 65% in equity including arbitrage; net long equity 15% to 40%; at least 10% in debt. | Mainly the net long part moves with the share market. |
Source: SEBI Master Circular for Mutual Funds, 20 Mar 2026, para 3.8.3 and its notes (a) and (b).
Trainer notes
Arbitrage, with assumed figures: a fund buys a share at ₹1,000 and at the same time sells its futures contract at ₹1,006. Held to the contract's expiry, the ₹6 gap, 0.6% before costs, is what the fund aims to capture whichever way the share moves. The gap varies and returns are not assured. SEBI's term is 'net long equity exposure'; fund houses describe it as the unhedged equity. A fund house may offer one scheme in each of the seven hybrid categories.
Rebalancing inside the fund
AN AGGRESSIVE HYBRID
The fund holds ₹750 crore in shares and ₹250 crore in debt.
The category allows 65% to 80% in equity.
Shares then rise 40%. Debt is unchanged.
- At the start: ₹750 crore ÷ ₹1,000 crore = 75% in equity. Inside the range.
- After the rise: shares are ₹750 crore × 1.40 = ₹1,050 crore. With ₹250 crore of debt, the fund is ₹1,300 crore.
- Equity is now ₹1,050 crore ÷ ₹1,300 crore = 80.8%. That is above the 80% ceiling.
- 80% of ₹1,300 crore is ₹1,040 crore. The fund moves at least ₹10 crore from shares into debt.
Result: The fund sells some of what rose and adds to the other asset. The mix is brought back inside the range.
Illustration with an invented fund and assumed figures. A 40% rise is not a forecast.
Trainer notes
It works the same way in reverse: after a sharp fall in shares, equity may drop below 65% and the fund adds shares. SEBI allows 30 business days to correct a breach caused by prices. The investor does nothing and holds the same number of units throughout. As generally understood, buying and selling inside the scheme is not a taxable event for the investor, who is taxed on redeeming or switching the units; check this point before quoting it. A dynamic fund rebalances by its own method, not to a fixed range.
The 65% test decides the tax
Tax law applies its own test to what the fund holds. The SEBI category name does not decide it.
| What the fund holds | How gains on units are taxed | Hybrids usually here |
|---|---|---|
| 65% or more in listed shares of Indian companies | Equity-oriented fund. Held 12 months or less: 20%. Held longer: 12.5% on gains above ₹1.25 lakh a year. | Aggressive Hybrid, Arbitrage, Equity Savings |
| More than 65% in debt and money market instruments | Slab rate, whatever the holding period, for units bought on or after 1 April 2023. | Conservative Hybrid |
| Neither of the two | A third set of rules, which turns on the holding period. See the notes. | Balanced Hybrid |
Source: Trustner Academy verified fact sheet (investments), 7 Oct 2026: Income-tax Act, 2025, sections 196 and 198; rates as of October 2026, before surcharge and cess.
Trainer notes
The ₹1.25 lakh is one yearly limit across a person's long-term gains on equity shares and equity-oriented funds. The tax test counts only listed Indian equity shares (annual average of monthly figures), so an Aggressive Hybrid near 65% may miss it. Third row, as generally understood: long-term after 24 months, 12.5% without indexation, otherwise slab rate; confirm before quoting. A Balanced Advantage or Multi Asset fund can fall in any row. Arbitrage positions are listed shares, so they count towards the 65%. Education, not tax advice.
Where hybrid assets stand
Hybrid schemes in India at the end of August 2026, in ₹ lakh crore. AMFI publishes these every month.
- ALL HYBRID SCHEMES
- 11.8613.6% of the industry's ₹87.08 lakh crore. Up 17.6% in one year.
- BALANCED ADVANTAGE
- 3.29Balanced Advantage / Dynamic Asset Allocation. The largest by assets.
- ARBITRAGE
- 3.02Aggressive Hybrid follows at ₹2.64 lakh crore.
- MULTI ASSET ALLOCATION
- 2.07Then Equity Savings 0.51, Conservative Hybrid 0.30, Balanced Hybrid 0.03.
Source: AMFI Monthly Note, August 2026 (month-end assets by hybrid category). The 13.6% share is computed from the same note.
Trainer notes
Exact figures in ₹ crore: hybrid 11,85,966 of 87,07,888; Balanced Advantage 3,29,104; Arbitrage 3,02,175; Aggressive Hybrid 2,63,987; Multi Asset 2,07,221; Equity Savings 50,508; Conservative 29,928; Balanced Hybrid 3,045. Size shows where money sits, not which category suits anyone. Refresh these from the AMFI Monthly Note each month.
What a hybrid fund does not assure
Capital or returns
No hybrid category guarantees the money put in, or any return. The equity part carries market risk; the debt part, interest-rate and credit risk.
A fixed mix
The category sets a range, not a number. Within it the mix moves with prices, and a dynamic fund's equity share can change widely.
A tax treatment
Tax follows the tax law's 65% test on what the fund holds, not the category name. Tax rules have also changed over time.
Take-away: An arbitrage fund's returns are not assured either, although its share positions are hedged.
Trainer notes
Use these three points whenever a client treats a hybrid as a halfway house with half the risk. A fund with 70% in shares loses about 7% of its value if shares fall 10% and debt is unchanged; the debt part can fall too when interest rates rise or a bond is downgraded.
If you learnt this from older material
What older decks say
- A balanced fund is about half shares, half debt.
- A fund house offers a balanced or an aggressive hybrid, not both.
- An arbitrage fund is defined only by its 65% in equity.
- Long-term gains on equity-oriented funds are taxed at 10%.
What holds now
- Balanced Hybrid is 40-60% equity; Aggressive Hybrid is 65-80%.
- It may offer both, since February 2026.
- Arbitrage Funds: no InvITs and limits on debt, since 2026.
- 12.5% above ₹1.25 lakh a year, since 23 July 2024.
Sources: SEBI circulars of 6 Oct 2017 and 26 Feb 2026; SEBI Master Circular, 20 Mar 2026, para 3.8.3; Trustner Academy fact sheet (tax), 7 Oct 2026.
Trainer notes
SEBI's circular of 26 February 2026 redid the categorisation; existing schemes had to comply by 26 August 2026. The seven hybrid categories and their equity ranges carried over. What changed for hybrids: a fund house may now offer both a Balanced Hybrid and an Aggressive Hybrid; an arbitrage fund may not hold InvITs and its debt part is kept to short-maturity and liquid instruments; and the scheme name must match the category.
Four things people get wrong
Misconception'A hybrid fund is half and half.'
What is trueEquity is 10% to 25% in a Conservative Hybrid, 65% to 80% in an Aggressive Hybrid, at least 65% in an Arbitrage Fund. Check the category.
Misconception'The debt part stops it falling.'
What is trueIt softens the fall; it does not stop it. With 70% in shares, a 10% fall in shares takes about 7% off the fund.
Misconception'Every hybrid is taxed like equity.'
What is trueOnly a fund that meets the 65% test in listed Indian shares. A Conservative Hybrid, which is mostly debt, does not.
Misconception'Arbitrage means a sure return.'
What is trueThe price gap it captures varies and can be small. Costs come out of it. Returns are not assured.
Trainer notes
Arithmetic for the second point: 70% × 10% = 7%, assuming the debt part is unchanged. All figures are assumed.
Check yourself
Question 1: A hybrid fund holds ₹600 crore in shares and ₹400 crore in debt. Shares fall 20%; debt is unchanged. What is the fund worth now, and what share of it is equity?
Answer: Shares: ₹600 crore × 0.80 = ₹480 crore. Fund: ₹480 crore + ₹400 crore = ₹880 crore, a fall of 12%. Equity share: 480 ÷ 880 = 54.5%, down from 60%.Question 2: A fund holds 20% in shares and 80% in debt and money market instruments. Which SEBI hybrid category fits this, and does it meet the 65% equity test?
Answer: Conservative Hybrid (10% to 25% in equity). It does not meet the equity test. With more than 65% in debt and money market instruments, gains on units bought on or after 1 April 2023 are taxed at the investor's slab rate.Question 3: A client says: 'Put me in a balanced fund, so I take half the risk of the market.' What would you explain?
Answer: 'Balanced fund' is not a SEBI category. A Balanced Hybrid Fund holds 40% to 60% in equity; an Aggressive Hybrid 65% to 80%; a Balanced Advantage Fund changes its mix. Each can fall in value and none assures returns. The category, the scheme documents and the tax test need to be looked at. We explain these; we do not promise an outcome.
Sources and disclaimer
Sources for the figures in this explainer
- Seven hybrid categories, their ranges, residual portion, foreign securities: SEBI Master Circular for Mutual Funds, 20 March 2026, para 3.8.3.
- Hybrid assets by category and industry assets, 31 August 2026: AMFI Monthly Note, August 2026.
- Tax tests and rates (equity-oriented 65%; over 65% debt; 20% and 12.5%; ₹1.25 lakh): Trustner Academy verified fact sheet, 7 October 2026.
- Both Balanced Hybrid and Aggressive Hybrid may now be offered; new limits on arbitrage funds: SEBI circulars of 6 October 2017 and 26 February 2026.
- Practice before the October 2017 categorisation: MyMoneySage, 17 July 2018 (secondary).
- The funds and all figures in the worked examples are invented for illustration. They do not refer to any real scheme.
This material is for training and investor education only. It is not investment, tax or legal advice and is not a recommendation to buy, sell or hold any security or scheme. Examples use assumed figures unless a source and date are shown. Mutual fund investments are subject to market risks; read all scheme related documents carefully. Trustner Asset Services Pvt. Ltd. is an AMFI-registered Mutual Fund Distributor (ARN-286886).