Hybrid Mutual Funds

A Hybrid Funds are type of mutual fund schemes that invests in two or more asset classes, also known as asset allocation funds. Investors can choose to invest in different types of hybrid funds, depending on their risk appetite and financial goals. There is an old saying that one should never put all the eggs in the same basket. The same is applicable for investments also. It is always advised to maintain diversification of investment portfolio across different asset classes like equity, debt, etc. A hybrid mutual fund offers this diversification under the same fund as such funds invest across asset classes. One can choose specific mutual fund scheme after considering their financial goals, investment horizon and risk appetite

Hybrid funds can be classified into different sub-categories as below:

Conservative Hybrid Fund – Such funds invest 75% to 90% in debt while investing 10% to 25% in equities.
Balanced Hybrid Fund - Such funds invest 40% to 60% in both equities and debt.
Aggressive Hybrid Fund - Such funds invest 65% to 80% in equities while investing 20% to 35% in debt.
Dynamic Asset Allocation or Balanced Advantage Fund – Such funds dynamically manage equity/ debt asset allocation within the investment portfolio depending upon the relative valuations of the asset classes.
Multi Asset Allocation Fund – Such funds invest in at least three asset classes with minimum 10% allocation in each of these asset classes.
Arbitrage Fund – Such funds adopt arbitrage strategy for generating returns while maintaining minimum 65% allocation in equities.
Equity Savings – Such funds invest in equity, debt and arbitrage strategies with minimum 65% allocation to equities and 10% allocation to debt.

Returns from Hybrid funds

The returns on hybrid funds depend upon the performance of the underlying portfolio. However, since investments in such funds is diversified across other asset classes besides equity, these funds are relatively less volatile than pure equity funds. However, the corresponding returns may also be lower due to the same reason.

How to invest in Hybrid Funds?

The process of investing in hybrid funds is the same as that for investing in any other mutual fund category. One can invest in hybrid funds through the website/ mobile application of the mutual fund house or physically submit the application form at official Points of Acceptance (POA).

Taxation of Hybrid Funds

The appreciation in the investment value of debt fund units is taxed at the time of redemption of mutual fund units. The tax rates for gains from hybrid funds depend on the asset allocation of the fund. If the fund has, on an average, held 65% or more of its net assets in equity securities of domestic companies, it can be categorised as equity-oriented fund, else they are categorized as other than equity funds for taxation purposes The gains from equity-oriented funds are taxed at 15% (plus applicable cess and surcharge) if the units are held for less than 12 months, while the tax rate is 10% (plus applicable cess and surcharge) if the units have been held for 12 months or more for gains beyond Rs. 1 lakh in a year. However, in case of other than equity funds, the gains for the units held for less than 36 months are taxed at the regular tax rates as applicable to the taxpayer and for units held for 36 months or more, they are eligible for Long-Term Capital Gains (LTCG) and are taxed at 20% (plus applicable cess and surcharge) after the indexation benefits. Note: The tax provisions mentioned in the article are for illustrative purposes only and are updated as per the Union Budget 2022 presented in the Parliament in February 2022. The tax rates for capital gains will be as per the tax laws applicable on the date of redemption/ sale and not on the investment date.

Frequently asked questions

Why should you invest in Hybrid Fund?

Hybrid Funds create a diversified portfolio spread across different asset classes, wherein the proportion of asset classes depend upon the investment objective of the fund. Hybrid Funds equips the investors with the stability of debt, coupled with the potential of wealth creation through equity. The investors also get benefited by managing their asset allocation and balancing the risk profile with a single investment product.

Who should invest in Hybrid Funds?

Hybrid Funds balance the investment strategy between equity and debt. As such, the investors seeking a diversified investment portfolio with different asset classes may invest in hybrid funds. The investors also have the luxury to invest across different sub-categories of hybrid funds, best suiting their risk profile, investment horizon, and financial goals.

What are the different types of hybrid funds?

The different types of hybrid funds are:

Conservative Hybrid Funds
Balanced Hybrid Funds
Aggressive Hybrid Funds
Balanced Advantage Fund
Multi Asset Allocation Fund
Arbitrage Fund
Equity Savings
Dynamic Asset Allocation or Balanced Advantage Fund

How are Hybrid Funds taxed?

Since the allocation of the portfolio between debt and equity may keep changing in a hybrid fund, the tax treatment of capital gains from such schemes may also differ accordingly. For taxation, mutual funds are classified into two categories – equity-oriented schemes and other schemes depending upon the percentage of the portfolio invested in listed equity shares of domestic companies.

In respect of dividend income received by the investors in the dividend option of the mutual fund, it is taxable at the regular tax rates as applicable to the investor. Further, the mutual funds are also required to deduct TDS @ 10% if an investor receives a dividend of more than Rs. 5,000 in a year from the mutual fund.

What is the return on Hybrid Funds?

The return on hybrid funds may depend upon the performance of the underlying portfolio. However, since such funds invest across equity and debt, such funds may be expected to be relatively less volatile than pure equity mutual fund schemes. However, the returns may also be relatively lower as against a diversified equity fund due to the same reason.

* Disclaimer - Past performance is not a guarantee of future returns and may or may not be sustained in the future.

Disclaimers:

The information set out above is included for general information purposes only and is not exhaustive and does not constitute legal or tax advice. In view of the individual nature of the tax consequences, each investor is advised to consult his or her or their own tax consultant with respect to specific tax implications arising out of their participation in the Scheme. Income Tax benefits to the mutual fund & to the unit holder is in accordance with the prevailing tax laws/finance bill 2020. Any action taken by you on the basis of the information contained herein is not intended as on offer or solicitation for the purchase and sales of any schemes of UTI mutual Fund. Please read the full details provided in SID and SIA carefully before taking any decision.

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