Conservative Hybrid Funds

What are Conservative Hybrid funds?

Conservative Hybrid schemes are open ended schemes predominantly investing in debt instruments. As per SEBI mandate these schemes should invest between 10% and 25% of total assets in equity related schemes and 75% and 90% of total assets in debt instruments.  These funds are also called as Monthly Income Plans.

Why one should invest in Conservative Hybrid funds?

The little exposure to equity help these schemes to earn extra returns than pure debt funds. Debt portion of the funds provide stability in case of volatility in equity markets.

Invest in Conservative Hybrid Funds to get better returns

Who should invest in Conservative Hybrid funds?

Conservative hybrid schemes are ideal for investors who want to have a small exposure to equity to earn extra returns but don’t have the risk appetite to invest in pure equity funds.

Investors with an investment horizon of a little over three years can invest in these funds.

What is tax implication on Conservative Hybrid funds?

Conservative Hybrid mutual funds are debt funds and taxed in accordance. For gains redeemed within three years of investing, the gains are taxable per the investor’s personal tax bracket. If the investor redeems after three years of investing, the gains are taxed at 20% with indexation (think of indexation as an inflation adjustment)

What is indexation?

Here’s a brief example of how indexation works (this is a crude illustration to spare you the technical jargon and intricate concepts)

Let’s assume the following:

  • Price of 1 kg apple today: INR 100
  • Annual inflation: 10%; hence, price of 1 kg apple next year INR 110 (100 price + 10% inflation)
  • Annual return on your investment: 15%
  • Tax rate: 20% with indexation

Let’s say your investment of INR 100 has grown to INR 115 (at 15% annual returns) in a year. You would be required to pay tax on the gains of INR 15 (INR 115 – INR 100).

However, during this period, the cost of 1 kg apple went up from INR 100 to INR 110 per kg due to inflation – this means that to maintain the same consumption, your INR 100 last year is equal to INR 110 this year.

Indexation benefit as a concept suggests that you pay tax only on the real gains beyond inflation – so instead of paying tax on INR 15 (115 current value – 100 investment), you pay tax on INR 5 (115 current value – 100 investment – 10 cost rise due to inflation)

How to invest in Conservative Hybrid Funds:
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