Hybrid Mutual Funds

Hybrid Mutual Funds are investment schemes that invest in a mix of asset classes (usually including equity, debt, gold and real estate investments) based on the fund's investment objective and market conditions. It offers a balance between growth and stability to investors, making it a suitable option for those aiming for growth with limited exposure to market volatility.

In a Hybrid Mutual Fund, the returns are generated through a combination of capital appreciation from equities, earning fixed income from debt securities and potential arbitrage opportunities in certain funds. By combining these, the fund aims to give you the growth potential of the stock market while using debt to act as a safety net, reducing overall volatility.

SEBI has structured hybrid funds into 7 distinct sub-categories based on their equity and debt allocation as outlined below:

• Conservative Hybrid Fund

The assets of conservative hybrid funds are allocated between 10% and 25% to equity and equity-related instruments, while the remaining 75% to 90% are allocated to debt instruments. Investors seeking relatively stable returns with a limited exposure to equity should consider this type of fund.

• Balanced Hybrid Fund

Balance hybrid funds invest 40% to 60% in both equity and debt and tend to maintain a balance between the two asset classes.

• Aggressive Hybrid Fund

Aggressive hybrid funds invest 65% to 80% in equity or equity-related instruments and 20% to 35% in debt instruments. It is suitable for investors seeking equity-like growth in their investment with some stability. 

• Dynamic Asset Allocation Fund or Balanced Advantage Fund

Dynamic asset allocation funds, also known as balanced advantage funds, are among the most popular hybrid fund categories. SEBI has no asset allocation limits for these funds, which means the money can be invested 0-100% in equity or debt; instead of maintaining a fixed equity or debt allocation, the fund manager adjusts the exposure based on their valuation metrics and recommendation of the financial model deployed by the fund.

• Multi Asset Allocation Fund

A multi-asset allocation fund invests in at least three different asset classes. Each of these asset classes must receive a minimum allocation of 10%. A typical example of such an asset mix includes equity, debt and gold instruments.

• Arbitrage Hybrid Fund

Although this fund is classified under hybrid-oriented taxation, it follows an arbitrage strategy. These funds invest a minimum of 65% in equity or equity related instruments. 

• Equity Savings Fund

Equity savings funds invest at least 65% in equity and related instruments along with a minimum 10% in debt.

Investing in Hybrid Mutual Funds can be done conveniently through Paisabazaar.

To begin your investment journey, follow the step-by-step instructions below:

Step 1: Open the Paisabazaar app.
Step 2: On the dashboard, tap on "Mutual Funds".
Step 3: Browse through the available fund options or search your preferred fund directly.
Step 4: Choose your desired mode of investment, selecting either a one-time payment or a Systematic Investment Plan (SIP).
Step 5: Complete your KYC verification and start investing.

The taxation of hybrid funds is determined by their asset allocation between equity and debt. Depending on the specific allocation percentage, a fund will be subject to either equity or debt taxation rules.

Equity exposure of 65% or more

• Hybrid funds that allocate 65% or more of their assets to equity or equity-oriented instruments are taxed as equity mutual funds. 
• This category includes Aggressive Hybrid Funds, Arbitrage Funds, Equity Savings Funds and Dynamic Asset Allocation/Balanced Advantage Funds.

Such mutual funds are taxed as below:

1. Short-Term Capital Gains (STCG): 20%, if units are sold within or up to 12 months.
2. Long-Term Capital Gains (LTCG): 12.5% after 12 months on gains exceeding ₹1.25 lakh in a financial year.
   
   These rates came into effect from July 23, 2024, after the Union Budget 2024-25 changes, and the LTCG exemption limit was raised from ₹1 lakh to ₹1.25 lakh at the same time.

Equity exposure between 35% and 65% or

Equity exposure below 35% but not qualified as Specified Mutual Funds

These types of funds, which do not qualify as either an Equity-Oriented Fund or a Specified Mutual Fund category, are generally taxed based on the holding period.

• LTCG: 12.5% (Holding period: more than 24 months for unlisted investments or more than 12 months for listed investments.)
• STCG: Applicable slab rate when the holding period is up to 24 months for unlisted investments or up to 12 months for listed investments.

Equity exposure below 35% but qualified as Specified Mutual Funds

• Hybrid funds with equity exposure below 35% are treated as Short-Term Capital Gains, irrespective of the holding periods and are taxed at applicable rates/slab rates. 

How to Check Which Tax Category Your Hybrid Fund Falls In

Since the equity threshold decides everything, don't guess based on the fund's name alone. Before investing, check the fund's factsheet or Scheme Information Document for its Net equity allocation and Gross equity, including arbitrage positions.

Dividend Taxation

Any dividend received from Hybrid Mutual Funds is added to the investor’s taxable income and taxed according to the applicable income tax slab. Asset Management Companies (AMCs) may also deduct TDS wherever applicable under prevailing tax provisions.