The Indian mutual fund industry has witnessed significant evolution in recent years, with hybrid funds emerging as a compelling investment avenue for investors seeking a balanced approach to wealth creation. These funds, which combine multiple asset classes within a single portfolio, have gained substantial traction among both retail and institutional investors.

Hybrid funds in India primarily invest in two or more asset classes, typically combining equity and debt instruments. 

Categories of Hybrid funds

The Securities and Exchange Board of India (SEBI) classifies hybrid funds into several categories:

  • Conservative Hybrid Funds: These invest 75-90% in debt instruments and 10-25% in equity.
  • Balanced Hybrid Funds: They maintain equal allocation between equity and debt (40-60% each).
  • Aggressive Hybrid Funds: Allocate 65-80% to equity and 20-35% to debt.
  • Multi-Asset Allocation Funds: Combine at least three asset classes with a minimum 10% in each.

How to Choose a Hybrid Fund

Investors should consider several factors when choosing hybrid funds:

  • Risk Tolerance: Different hybrid categories cater to varying risk appetites. Conservative investors should look for funds with a higher debt allocation while aggressive investors should choose funds with a higher equity component. 
  • Investment Horizon: Medium to long-term investment perspective is recommended.
  • Asset Allocation: Choose funds aligned with personal financial goals.
  • Tax Efficiency: Consider the tax implications based on the fund’s equity-debt mix. Funds which have 65% equity component are taxed as equity funds and those with less than 65% equity are taxed as debt funds. 

Advantages of Hybrid funds

  • Safer bet compared with pure equity: They invest in all categories like equity, debt, Commodity etc. thus portfolio may be rebalanced to avoid higher risk of pure equities.
  • Funds for all risk profiles: Different categories of funds can be chosen for different risk profiles. 
  • Funds for all investment periods: Arbitrage funds for few days or weeks, equity funds for a year or two and hybrid aggressive funds for long-term investment needs. 
  • Risk diversification: Offers risk diversification between equity, debt, Commodity etc. 
  • Small investments for bigger corpus: Investments through Systematic Investments Plans of these funds helps investors set aside small sums at regular intervals for building a corpus. 

Recent Developments 

SEBI has proposed the introduction of hybrid passive funds, marking a significant development in this space. This innovation may allow fund houses to launch passive products that can replicate composite indices comprising fixed proportions of equity and debt. The regulator has proposed three types of passive hybrid funds:

  • Debt-oriented passive hybrid fund (25% equity, 75% debt)
  • Balanced passive hybrid fund (50% equity, 50% debt)
  • Equity-oriented passive hybrid fund (75% equity, 25% debt)

Taxation Structure

The Union Budget 2024 has introduced significant tax relief measures for hybrid funds. Key changes include:

  • Long-term capital gains (LTCG) tax reduced to 12.5% from previous rates that could be as high as 30%
  • Simplified holding periods: 24 months for debt-oriented and 12 months for equity-oriented funds
  • Uniform tax rates across categories, providing clarity and simplicity
  • Capital gains exemption threshold increased from Rs 1 lakh to Rs 1.25 lakh

For equity-oriented hybrid funds (more than 65% in equity):

  • LTCG tax: 12.5% after 12 months
  • STCG tax: 20%

For debt-oriented hybrid funds (more than 65% in debt):

  • Taxed at investor’s slab rate
  • No indexation benefits

Hybrid funds have established themselves as a mature investment option in India’s mutual fund landscape. Their ability to combine growth potential with stability makes them particularly attractive for investors seeking a balanced approach to wealth creation.

The introduction of passive hybrid funds and favorable tax changes suggests a bright future for this category. For investors looking to navigate India’s dynamic market conditions while maintaining a balanced risk profile, hybrid funds offer a compelling investment avenue. Hybrid funds also offer arbitrage opportunities and investors have used them to make short term gains as well. 

As the Indian investment landscape continues to evolve, hybrid funds are well-positioned to play an increasingly important role in investor portfolios. The category’s growth potential, coupled

with regulatory support and innovation from fund houses, indicates that hybrid funds may remain a cornerstone of many Indian investors’ portfolios in the years to come.

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