Hybrid mutual funds allow you to invest in a combination of debt and equity. These are called balanced funds.
In an equity hybrid fund, at least 65% of the corpus in invested in equities and the rest in debt. To be called equity fund, at least 65% of the fund needs to be invested in equity. The remaining corpus is invested in debt up to a maximum of 35%.
In a debt hybrid fund, at least 75% of the corpus is invested in debt and rest in equities.
Why invest in Hybrid Funds?
Hybrid funds have an exposure to debt. This protects your investment when stock markets are volatile or crash.
Better than Debt Funds
When stock markets rise or there is a bull run, the hybrid funds give better returns than debt funds.
When an exposure to both equity and debt, the hybrid fund is naturally diversified. You don’t have the headache of balancing the portfolio.
Equity hybrid funds are treated as equity, for tax purposes. Long term capital gains are tax exempt, just like equity.
Capital Protection Funds
This debt oriented fund is close ended and has 80% in debt and 20% in equity. The huge proportion of debt ensures capital protection, as it is close ended in nature and the equity component helps in gaining decent returns in the stock markets. These funds cannot use the word “guaranteed” or “capital protection”. They can only be called as capital protection oriented. These funds purchase “AAA” rated debt or debt of very high quality, which helps the principal amounts grow over a fixed tenure. This protects the capital and the equity component generates returns, far in excess of its proportion, by investing in the options and futures market.
Monthly Income Plan (MIP)
- These are basically debt oriented mutual funds which invest 75-80% of the corpus in debt and the rest in equity. These funds can be further divided into a monthly income plan with a dividend option and one with a growth option.
- The dividend option helps to generate income in the form of dividends, which are tax free in the hands of the investors.
- In the growth option, no dividend is paid. The amounts are reinvested in the fund itself. This increases the value of the fund and huge returns are obtained on liquidation of these funds.
- If the MIP is sold for a profit within a year, it is called a short term capital gain. These amounts are added to your income and taxed as per the income tax slab you fall under. Long term capital gains beyond a year, are taxed at 20% with indexation benefits.
Tax aspects of Hybrid Funds
- Equity hybrids are taxed just like an equity mutual fund. If the equity hybrid is sold under a year, the short term capital gains are taxed at 15%. If the equity hybrid is sold after a year there is no tax.
- Debt hybrids are taxed just like a debt fund. Short term capital gains (gains under 3 years), are added to your taxable salary. Taxed as per income tax slab you fall under. Long term capital gains (gains over 3 years), are taxed at 20% with indexation.