What is the tax treatment for hybrid mutual funds?

Financial planners believe hybrid funds are a suitable mutual fund product for conservative investors or those looking to start their journey toward building financial assets.

WHAT ARE HYBRID FUNDS?
Hybrid funds are mutual funds that invest in multiple asset classes, such as a combination of equity and debt, or equity and gold.


WHAT ARE THE DIFFERENT TYPES OF HYBRID FUNDS AVAILABLE?
There are different categories of hybrid funds available for investors to choose based on their risk-taking ability.

a) Aggressive Hybrid Fund: These schemes allocate 65% to 80% of their portfolio in equity with the rest in a mix of debt and money market instruments. Here, the fixed income allocation is in the range of 20% to 35%.

b) Balanced Advantage or Dynamic Asset Allocation Fund: These schemes use proprietary valuation models to decide their equity allocation. They invest in a mix of equity and debt depending on valuations and market conditions based on a pre-decided internal investment model. They could have up to 35% in debt, some allocation to arbitrage and the rest in equity.

c) Multi-Asset Allocation Fund: These funds have a minimum of 10% in at least three asset classes — typically equity, debt and gold — and alter the allocation based on market conditions. Some schemes also invest in international equities and REITs or InvITs.

d) Equity Savings Fund: Invests in equity, debt and arbitrage opportunities in the cash and derivative segments of the equity market, with the equity and arbitrage portion constituting 65% of the portfolio. The unhedged equity portion of the portfolio is conservatively managed and could be between 10% and 25%

WHAT IS THE TAX TREATMENT FOR HYBRID FUNDS?
Most hybrid fund categories mentioned above are treated as equity funds for taxation. This means if the units are held for less than a year, the investor pays a short-term capital gains tax of 20%, while if held for more than a year, investors pay a long-term capital gains tax of 12.5% only.

HOW DO THEY HELP INVESTORS?
Hybrid funds help investors put money in different asset classes through a single scheme and help in automatic asset allocation. Another benefit for high-net-worth individuals is that even though money is allocated to fixed income, the scheme is treated as an equity fund for taxation