Every investor is different. There are some who like taking risks and enjoy the potential of high returns. On the other hand, there are some who are very conservative in terms of taking risks. They don’t mind the low returns as long as they are assured of capital security. Then there are those who are in the middle of the risk spectrum. They are not too aggressive neither too conservative. They look for moderate risks with moderate returns.
To suit the investment preference of these different types of investors, mutual funds come in different variants. One such variant is the hybrid mutual fund which is suitable for moderate investors who lie in the middle of the risk spectrum. Let’s understand the concept of hybrid mutual funds and their tax implications –
What are hybrid mutual funds?
Hybrid funds are mutual funds which invest in both equity as well as debt instruments. The return potential of equity investment is added to the stability of debt investments in hybrid mutual funds giving investors the best of both worlds.
Types of hybrid mutual funds
Hybrid mutual funds are further divided into different categories based on the asset allocation of the portfolio of the fund. These sub-categories of hybrid funds include the following –
- Balanced funds
Balanced funds are those funds where at least 65% of the portfolio is invested in equity and equity-oriented instruments. The remaining is invested in debt and money market instruments.
- Monthly Income Plans
These funds are those which invest at least 65% of their portfolio in debt and debt related instruments. 15% to 20% of the portfolio is invested in equity. Monthly Income Plans (MIPs) allow investors regular returns through dividends. Investors can choose the frequency of receiving dividends based on their requirements. Moreover, there is also a growth option where, instead of receiving regular dividends, the portfolio grows as per the market movements. So, MIPs might give regular incomes or might not depending on the fund option the investor chooses.
- Arbitrage funds
In these funds, the fund manager buys the assets of the portfolio in the cash market and sells them in futures or derivatives market at a higher price to generate returns. If, however, arbitrage opportunities are not available, the fund managers invest in debt instruments or cash.
Taxation of hybrid funds
The tax treatment of investing in hybrid funds depends on the asset allocation of the fund. If the fund is equity-oriented, it is treated as an equity mutual fund and taxed accordingly. If, on the other hand, if the fund invests 65% or more of its assets in debts, the fund is treated as a debt mutual fund and taxed accordingly. So, here are the tax implications of different hybrid funds –
| Types of hybrid funds | Tax on investment | Tax on returns | |
| Balanced funds (equity-oriented hybrid funds) |
There is no rebate on investing in a hybrid fund. The investment amount is a part of the investor’s post-tax income. | Short-Term: If the fund is held for less than 12 months, the gain incurred is called short-term capital gain.
|
Long-Term: If the fund is held for more than 12 months, the gain incurred is called long-term capital gain. Tax on long-term capital gain – 10% if the gain is more than INR 1 lakh |
| Monthly income plans (debt-oriented hybrid funds) |
There is no rebate on investing in a hybrid fund. The investment amount is a part of the investor’s post-tax income. | Short-Term: If the fund is held for less than 36 months, the gain incurred is called short-term capital gain.
|
Long-Term: If the fund is held for more than 36 months, the gain incurred is called long-term capital gain.
Tax on long-term capital gain – 20% after indexation benefit |
| Arbitrage funds (equity-oriented hybrid funds) |
There is no rebate on investing in a hybrid fund. The investment amount is a part of the investor’s post-tax income. | Short-Term: If the fund is held for less than 12 months, the gain incurred is called short-term capital gain.
|
Long-Term: If the fund is held for more than 12 months, the gain incurred is called long-term capital gain. Tax on long-term capital gain – 10% on the long-term capital gain more INR 1 lakh p.a. |
So, understand the concept of hybrid funds if you are a moderate investor looking to reduce the risk while at the same time expecting equity oriented returns.
