Who Should Invest in Hybrid Funds and Tax Implications

Who Should Invest in Hybrid Funds?

Equity-focused funds also known as aggressive funds are recommended for high-risk investors aiming for capital appreciation with some investment stability. Alternatively, debt-focused funds known as conservative hybrid funds are advisable for conservative investors who want to earn better returns with a little equity exposure.

Hybrid funds are versatile and all types of investors from risk-averse to high-risk takers may choose to invest in these schemes. This versatility makes it an ideal investment option for novice as well as seasoned investors.

Investors Investing for Medium to Long-Term

If you want to invest for a period between three and five years, these funds can be a good choice. Since the fund corpus is invested in different asset classes, it may require medium to long-term to generate higher returns and capital appreciation.

First-timers and Conservative Investors

These types of mutual fund schemes aim to balance the risks and rewards by adopting moderately aggressive investing and a sensible safety precautionary approach in the investment strategy. This makes it a good entry point for first-time investors who do not have the experience or expertise to understand market complexities. Moreover, the debt exposure of these funds makes it suitable for conservative investors who want to earn slightly better returns than pure debt funds but want to limit their risk of equity exposure.

Tax Implications on Hybrid Funds

The tax implications depend on the investment tenure and the proportion of equity and debt exposure taken by the chosen scheme. The general tax implications are as below:

Equity-Oriented Funds

More than 65% of the fund corpus is invested in equity and related instruments. For tax purposes, these are considered as equity funds and taxed as below: If the holding period is less than 12 months, short-term capital gains are taxed at a flat rate of 15%

If the holding period exceeds 12 months, long-term capital gains amounting to over INR 1 lakh are taxed at 10% without any indexation benefits

Dividends earned on equity hybrid funds are subject to a dividend distribution tax (DDT) rate of 10% excluding cess and surcharge

Debt-Oriented Funds

At least 65% of the fund corpus is invested in debt and related securities. Taxation on debt-oriented funds is as follows:
If the holding period is less than three years, the short-term capital gains are added to your income and taxed at the applicable slab

If the investment tenure exceeds three years, the long-term capital gains are taxed at 20% with indexation benefits and 10% without indexation benefits Dividends distributed on debt-oriented funds are subject to a DDT of 25% excluding cess and surcharge but investors do not have to pay tax on their dividend income

Hybrid funds are diversified investments suitable for earning stable returns and capital appreciation in the long-term. To know more about these funds and to find the best hybrid funds to be included in your investment portfolio, connect with our SRH experts with more than two decades of wealth advisory experience.