The best part about considering diversifying your investment portfolio with mutual funds is that there are a plethora of options to choose from. There are mutual funds catering to the financial needs of almost all types of investors. And thanks to the introduction of the Systematic Investment Plan, one can even make small, periodic investments and give themselves an opportunity to create wealth over the long term.
Mutual funds can be largely categorized as equity, debt, and hybrid. Equity funds are those mutual funds that aim at generating returns over the long term by investing the majority of their investible corpus in equity and equity related instruments of financially stable and sound companies that are listed on the stock exchange. Debt funds on the other hand are the exact opposite of equity funds. They do not invest in the stock market or take any extra risk. In fact, the main investment objective of most debt mutual funds is to safeguard the investor’s capital and generate stable returns by investing in fixed income securities and debt related money market instruments.
Hybrid funds are a combination of equity and debt asset. A hybrid fund’s investment objective is to push its portfolio for maximizing returns by allocating some of its assets to equity and the remaining of the asset to debt so that the scheme gets the necessary cushion at the same time. Hybrid funds follow a unique asset allocation strategy as they are the only mutual fund schemes of combine the best of both asset classes.
What are the different types of hybrid funds?
Hybrid funds can be – equity oriented as well as debt oriented.
Equity oriented hybrid funds are those mutual fund schemes that invest a majority of their investible corpus in equity and the remaining in debt. Of its total assets, equity oriented hybrid funds may invest a minimum of 65 percent to 80 percent in equity and the remaining of the assets is allocated to the debt. Schemes like Aggressive Hybrid Funds are an example of equity oriented hybrid funds.
Debt oriented hybrid funds are those schemes that aim at generating capital appreciation with a primary focus on ensuring that the scheme is able to offer enough capital protection. Of its total assets, debt oriented hybrid funds may invest a minimum of 65 percent to 80 percent in debt and the remaining of the assets is allocated to equity. Schemes like Conservative Hybrid Funds are an example of equity oriented hybrid funds.
How are Hybrid Funds taxed?
Capital gains on your hybrid funds will be taxed depending on which type of hybrid scheme you choose to invest in. The equity portion of hybrid funds is taxed just like capital gains on equity funds are taxed. Long term capital gains (LTCG) exceeding Rs.100000 on the equity component of a hybrid fund are taxed at the rate of 10 percent. On the other hand, short term capital gains (STCG) earned through the equity component of a hybrid fund are taxed at 15 percent Now coming to the taxation on the debt portion of the hybrid fun’s overall portfolio. The debt component of any hybrid scheme is taxable just like gains from debt funds are taxed. Investors will be taxed based on the taxed income slab that they currently fall under. LTCG from the debt component of a hybrid fund is taxable at 20% after indexation benefit and 10% without the benefit of indexation.
If you have any confusion regarding the taxation on hybrid funds, please reach out to your financial advisor to clear all your queries.