scorecardresearchWhat are conservative hybrid funds that are set to lose their LTCG benefit

What are conservative hybrid funds that are set to lose their LTCG benefit from April 1?

Updated: 28 Mar 2023, 11:18 AM IST
TL;DR.

Conservative hybrid funds are schemes that invest between 10- 25 percent of their portfolio in equity.

Conservative hybrid mutual funds have exposure to equity as well as debt instruments but since they are conservative, their exposure to equity is only limited

Conservative hybrid mutual funds have exposure to equity as well as debt instruments but since they are conservative, their exposure to equity is only limited

As the new taxation rules for debt mutual funds are set to come into force with effect from April 1, it is imperative to note that these rules will also apply to hybrid funds that have equity exposure of less than 35 percent.

These also include conservative hybrid mutual funds. Let us first explain what do these funds entail.

Hybrid mutual funds

Mutual funds that invest primarily in fixed income instruments (between 75-90 percent allocation) such as bonds or fixed deposits with a small exposure to equity and equity-related instruments (somewhere between 10-25 percent) are referred to as hybrid mutual funds.

They aim to offer better returns than typical debt instruments because they have an exposure, albeit small, to equity.

These funds are typically meant for investors with a low risk-appetite who prioritise capital protection over potential to earn higher returns.

As per the latest AMFI (Association of Mutual Funds in India) data, there are only 20 conservative hybrid schemes with net assets under management (AUM) of 22,716 crore as on Feb 28, 2023.

This figure is far lower than other categories of hybrid funds. For instance, balanced advantage fund has 28 schemes with net AUMs of 1,91,440 crore. At the same time, aggressive hybrid funds have as many as 31 schemes with net AUMs of 1,53,637 on the same date.

Advantages

One of the key advantages of investing in these mutual funds is that they deliver better returns than other debt mutual funds since these schemes have an exposure to equity as well.

However, at the same time, these funds are less risky than other categories of hybrid funds because of a higher concentration of fixed income instruments such as bonds.

Another advantage that these funds offer is that they are diversified in nature and claim to give the best of both the worlds.

Allocation to debt funds ensure stability whereas investment in equity offers some scope of growth, and therefore, higher returns.

In conclusion, we can say that these funds are a good bet for investors with a low-risk appetite who want to invest in the debt-heavy schemes.

However, before deciding to invest, one must be mindful of the fact they stand to lose their tax privileges (just as other non-equity fund schemes) from next financial year onwards.

 

Article
Common mistakes early investors should avoid.
First Published: 28 Mar 2023, 11:17 AM IST