Six Things You Should Know About Hybrid Mutual Funds

Published On: 19-Dec-2021

It is always advised, "one should not have all eggs in the same basket." This advice works well in the investment world too, as no single asset class has always been a winner for investors. As such, the investors tend to prefer having a diversified investment portfolio across different asset classes.

This enables them to benefit with better returns as and when such asset classes outperform. However, in an attempt to have a diversified portfolio, an investor may hold multiple schemes investing in different asset classes. This is where hybrid funds come to the rescue of the investors, enabling them to have exposure to both debt and equity securities within a single mutual fund scheme.

Here are six things you should know about hybrid mutual funds:

Investment Pattern

Hybrid Funds are funds that enjoy the flexibility to invest in equity markets and debt securities simultaneously. The equity component helps with the long-term potential of higher returns, while the debt component could provide stability to the portfolio.

Further, the hybrid funds may also invest in other asset classes, like real estate, gold, etc., depending upon their investment mandate.

Different Mutual Fund Schemes under Hybrid Funds

An investor can invest in conservative/ balanced/ aggressive hybrid funds, dynamic asset allocation funds, multi-asset funds, arbitrage funds, and equity savings funds. These sub-categories within the broad category of hybrid funds have been made based on the targeted asset allocation range for the mutual fund scheme.

Diversification of Portfolio

While hybrid funds impart automatic diversification to the investment portfolio, such funds can diversify separately within the equity and debt portfolios. As such, hybrid funds are best suited to capture portfolio diversification within a single mutual fund scheme.

Effortless Rebalancing of Investment Portfolio

If an investor maintains asset allocation through equity and debt schemes separately, one may need to periodically rebalance the investment portfolio as per their asset allocation strategy. This not only requires conscious efforts and time but may also subject to tax incidence for the redemptions made to rebalance the investment portfolio.

In contrast, hybrid funds tend to rebalance the asset allocation within the investment portfolio periodically as per the stated investment mandate. No action is required from the investor specifically to rebalance the investment portfolio.

Investing in Hybrid Funds

An investor can invest in either Growth option or 'Payout of Income Distribution cum capital withdrawal' option (erstwhile called dividend option). The profits realised by the fund are reinvested in the scheme under the Growth option, while such profits may be distributed under the Payout option.

One can invest in hybrid funds by physically submitting the application form at any of the Official Points of Acceptance or by investing through the website/ mobile application of the fund house.

Taxation of Returns from Hybrid Fund

The tax rates depend upon the investment pattern of the mutual funds. Equity-oriented funds must invest at least 65% of their net assets in equities or equity-related instruments of domestic companies listed in India.

All the other mutual fund schemes are categorised in the residual category. Since the hybrid funds may invest across equity and debt, the tax incidence would depend upon the actual investment pattern of such hybrid funds. Here is a summary of the tax rates as applicable to mutual funds:

If the scheme is classified as ->

Equity-oriented Funds

Other Funds

Short Term Capital Gain

 

 

Holding Period

Less than 12 months

Less than 36 months

Tax Rate

15%

Regular tax rates

Long Term Capital Gain

 

 

Holding Period

12 months or more

36 months or more

Tax Rate

10%

20%

Indexation allowed

No

Yes

Further, Long Term Capital Gains from the sale/ redemption of equity shares and equity-oriented mutual funds taken together are exempt up to Rs. 1 lakh per year.

Note: The tax provisions, as mentioned in the article, are for illustrative purposes only and are updated as per the Union Budget 2021 passed by the Parliament. The tax rates for capital gains will be as per the tax laws applicable on the date of redemption/ sale and not on the date of investment.