Looking for investment options with better post-tax returns? Try these hybrid funds

Investors looking to allocate to fixed income products that enjoy better tax treatment than traditional choices, such as fixed deposits, non-convertible debentures and debt mutual funds, should consider including hybrid funds in their portfolios. These plans provide taxation benefits that apply to equity-oriented programmes, thus ensuring better tax-adjusted returns.

What are hybrid funds?
It is a category of mutual funds investing in more than one asset class. These plans typically combine equity and debt, while some also include gold and REITs.

What is the tax advantage of a hybrid fund?
Hybrid funds are treated as equity funds for taxation. This means if held for less than a year, an investor pays short-term capital gains tax of 15%, while if held for more than a year, savers pay long-term capital gains tax of 10% only. Thus, an investor in high tax brackets gets allocation to fixed income by holding such funds but eventually pays a lower tax.


What is the benefit of investing in a hybrid fund?
Hybrid funds help retail investors buy a single fund instead of buying two or multiple funds.

What are the types of hybrid funds that can be used by investors to meet a part of their fixed income allocation?
Investors can consider using some of the following categories based on their risk appetite, but must consider their overall asset allocation before making their investment decisions:

a) Aggressive Hybrid Fund: Invests between 65% and 80% of assets in equity with the balance in debt and money market instruments. Here, the fixed income allocation is about 30-35% in most cases.

b) Balanced Advantage or Dynamic Asset Allocation Fund: Invests in a mix of equity and debt depending on valuations and market conditions on a pre-decided internal investment model. They could have up to 35% in debt, though it could be lower than that threshold at times.

c) Multi Asset Allocation Fund: Invests a minimum of 10% in at least three asset classes – typically, equity, debt and gold — and alters its allocation based on market conditions. This will work well if it has equity taxation.

d) Arbitrage Fund: These funds simultaneously purchase stocks in the cash market and sell in the futures market to earn a spread and get equity taxation. They carry no credit risk.

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