Hybrid Fund: Are debt funds good for investment or hybrid funds, what is the difference between the two, which is better to invest in – choose hybrid fund to compete with debt fund tax

Then there are hybrid funds that have more than 65% exposure to equity. For gains above Rs 1 lakh per annum, held for more than a year, they will be taxed at 10%. Most of the categories of hybrid funds fall in the third segment but MFs reduce their effective equity exposure by using arbitrage strategy. For example, a Balanced Advantage fund may have 67% of its investments in domestic equities but they can sell futures of 30% of their fund. Once this happens, the hybrid fund turns into a fund with 37% equity exposure. However, it still retains the tax benefit of meeting the 65% limit. This engineering of the fund has helped different categories of hybrid funds to reduce the tax burden on the mutual fund investor.

For debt funds with some extra exposure to equity in the hybrid fund category, Balanced Advantage Fund and Equity Savings Fund are the two most natural options. Balanced Advantage Funds are free to increase or decrease their equity-debt ratio depending on the market conditions. Usually they invest more than 65% in equity to meet the tax limit but use arbitrage to balance it according to market conditions. Equity Savings Funds also follow the same strategy but they cannot invest more than 50% in equity. Fund houses generally keep only 33% of this limit.