Hybrid funds are back on investor's radar

MUMBAI: Mutual fund houses such as DSP Blackrock, Reliance and JP Morgan have launched close-ended hybrid schemes that will invest in a mix of debt and equity. These schemes mature in 36 months and they are suitable for investors with low risk profile. They also may look appealing on the back of a depressed stock market.

These schemes will invest mostly in fixed income securities such as corporate bonds, government securities and money market securities that mature on or before the maturity date of the scheme. This will help investors to avoid interest rate risks and it will also reduce volatility. A small part of the corpus would be invested in equities. The equity component is expected to offer capital appreciation to investors. It makes sense to lock in rates for three years now as rates are widely expected to move down and the equities too are quoting at attractive valuation.

However, investors should keep in mind couple of factors before investing their money. First is lack of liquidity. These schemes do not buy back their units from investors. The units of these schemes are listed on stock exchanges and in most cases they are illiquid in nature, making exit almost impossible. Another factor that makes many wary of these funds is the tax treatment. The returns from these funds are taxed like debt funds. While dividends declared attract a tax of 13.52%, short term capital gains are taxed at marginal rate of tax which for highest bracket stands at 30.9%. Long term gains are taxed at lower of 20.6% with indexation or 10.3% without indexation.