Do you want to learn how hybrid funds are taxed? Read on

by readyrewind

Based on their risk-return profile, investments can be broadly divided into three categories: hybrid, debt, and equity. Since everyone has unique requirements and goals, it is challenging to categorise whether you can solely take high or low risks. But hybrid mutual funds provide a solution to take the balanced path.

What are hybrid funds?

Hybrid funds invest in both debt and equity instruments to diversify the holdings and reduce risk concentration. The three main elements of hybrid funds are correlation, asset allocation, and diversification. These funds are good for you if you look for good returns at moderate risks.

Features of hybrid funds

  • You don’t need to be concerned if over time the asset mix of the hybrid fund deviates from the desired asset mix. This is because fund managers keep an eye on how changes in the market influence your mutual fund portfolio and rebalance it as required.
  • Hybrid funds accommodate a range of risk appetites for big investors, from conservative to aggressive. 
  • Hybrid fund investments are suitable if you can keep the units for at least three to five years. They have the potential to provide positive results by generating regular income in the short term and wealth in the long term.

How are hybrid funds taxed?

Depending on the asset allocation of the hybrid fund, it will either be treated as an equity fund or a debt fund for tax purposes. All hybrid funds with more than 65% exposure to equity investments are taxed as an equity fund. For hybrid funds with equity exposure lower than 65%, taxation rules for debt funds are followed. 

Debt hybrid funds

  • Short-Term Capital Gains (STCGs) are added to your taxable income and taxed as per your income tax slab rate. Gains on debt funds held for less than three years are considered STCGs.
  • Long-Term Capital Gains (LTCGs) are taxed at 20% with indexation or at 10% without indexation benefits. Gains on debt funds held for more than three years are considered LTCGs.

Equity hybrid funds

  • If the holding period of an equity hybrid fund is less than a year, the investment is said to be short-term. And the profits that result from it are considered STCGs. These have a tax rate of 15%. 
  • Gains on equity hybrid funds with a holding period of longer than a year are considered LTCGs. LTCGs on equity funds up to Rs 1 lakh are exempt from taxation. Gains above Rs 1 lakh are taxed at 10% without indexation benefits. 

Who should invest in hybrid funds?

Hybrid funds are great if you want to diversify your portfolio quickly with just one or two investment options. You can go through the various mutual fund schemes in this category and select one to invest in based on how the risk-return profile aligns with your financial goals. It is recommended to have an investment horizon of more than three years when investing in hybrid funds. 

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