A Hybrid Fund is a type of Mutual Fund which is combination of equity, debt and bonds. This can be awesome a threeway combination to invest when distributed according to ones risk capacity.
Hybrid Funds can work wonders as it is distributed among different asset classes. Wide range of diversification can help to mitigate risks against any particular asset class.
Fund managers have the right to move corpus from debt to equity or equity to debt depending on the market conditions in a hybrid fund.
Hybrid funds can be considered by the following set of investors:
1) Who are looking for both current income and long-term capital appreciation.
2) Individuals who are ready to tolerate moderate risk.
3) Expecting higher growth potential compared to other bond funds.
4) Looking to diversify by investing in both stocks and bonds within a single fund.
There are different types of Hybrid funds categorized based on the equity-debt ratio.
These hybrid funds are tilted towards equities when compared to debt in the portfolio. These funds carry more risk due to greater exposure towards equities. Such funds can also be ideal for people who are less risk averse but who are looking fro long-term investment.
Tax: If equity is distributed more than 65 per cent in the portfolio, than it shall not attract any taxes, as is the case with equity mutual fund schemes which are held for over a year and which do not attract long term capital gains tax liability.
Debt Oriented Hybrid Funds
These funds can further be classified as conservative, moderate or aggressive funds, depending on the exposure of equity and debt. Conservative hybrid funds will lhave equity exposure to 10 per cent, a moderate can go upto 20 per cent and aggressive hybrid mutual fund will have option of exposure up to 30 per cent.
Individuals who are less risk averse but looking for exposure can opt for one these funds depending on the risk taking capacity.
Tax: These are treated same as debt instruments. If holding period is 3 years than these are treated for long term capital gains tax.
There are other mutual funds called as Arbitrage funds, that benefits from the difference in price in the cash and derivatives market for generating returns.
The taxation on arbitrage funds are treated as equity funds.
Asset allocation can also be termed as hybrid funds, which keep varying with its exposure around asset classes. Most of these funds are funds of funds schemes. For funds of funds the taxation is same as that of debt funds.