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What is a hybrid mutual fund?

Hybrid mutual funds allow you to invest in a combination of debt and equity. These are also called balanced funds.
You have:

Equity Hybrid: In an equity hybrid fund, at least 65% of the corpus is invested in equities and the rest in debt. To be called an 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%.

Debt Hybrid: In a debt hybrid fund, at least 75% of the corpus is invested in debt and the rest in equities.

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Why invest in Hybrid Funds

Safety

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.

 

Natural Diversification

With an exposure to both equity and debt the hybrid fund is naturally diversified. You don't have the headache of balancing the portfolio.

Tax Benefits

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.

 

Concepts & FAQ's Hybrid Funds

What is a Hybrid Mutual Fund?

Hybrid Mutual Funds are characterized by portfolio that is made up of a mix of stocks (equity) and bonds (debt). The mix and percentage can vary over time in reaction to the market conditions as perceived by the fund manager, or the mix could remain fixed.

The purpose of Hybrid Mutual Funds is to provide a balanced portfolio proving both growth and security to the investor's investments.

For what kind of investors is Hybrid Mutual Funds suitable?

Balanced funds are a good starting point for most first-time investors because of the pre-defined equity-debt mix

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Frequently Asked Questions

What are equity funds?

Equity funds are those which invest primarily in stocks. Within equity funds, the structure of a particular fund may differ from that of another. Equity funds include diversified funds, market capitalization based funds, sector specific funds, theme based funds and tax saving funds. Equity funds are generally aimed at providing comparatively high returns within the mutual finds family, but with a relatively higher degree of risk.

How does an investor in equities make money?

Investors get returns on their investments in two ways - dividend and capital gains. The former depends on earning levels of the particular company and the decision of its management. The latter arises happens when the market price of the shares rises above the level at which the investment was made.

Why invest in equities?

Investing in equities/shares offers many benefits over other asset classes like a high level of liquidity which unlike property, gives you ready access to your money. There are more than 6000 companies listed on the stock market in which you can buy shares so there are plenty to choose from to match your investment needs.

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