Hybrid Funds vs Debt Funds: Which is the Right Choice for You After the Latest Taxation Changes?

If you're a believer in the mantra "Mutual funds, Sahi Hai" and regularly contribute to your investments through SIP, this blog is a must-read for you. The latest Finance Bill has introduced a significant amendment regarding debt-oriented mutual funds. As of April 1, 2023, all investments made in debt-oriented mutual funds will no longer enjoy the indexation benefit and will be subject to tax at applicable slab rates.

This amendment has led investors to question their decision to invest in debt-oriented mutual funds. It has even raised concerns about investors’ preference to invest in debt-oriented mutual funds over an FD! So, let's take a closer look at the actual impact of this amendment on the taxation scenario, and how it will affect the investors’ mindset about mutual funds going forward.

Breaking down Mutual Fund Taxation post amendment:

The Finance Bill amendment has created 3 possible taxation scenarios for mutual fund investors. Let's explore each of these scenarios to help you determine which option may be the right choice for you:

Based on the above image you can see that taxation of Equity based mutual funds and Hybrid mutual funds are unchanged post-finance bill amendment. Mutual funds with more than or equal to 60% of total Investments in Equities still enjoy indexation benefits. Therefore, for investors who are willing to alter their risk appetite a bit, hybrid mutual funds are a great option to park their savings.

Equity-Based Mutual Funds:

From the fixed income comfort of a debt-oriented mutual fund Investor, it is hard to convince them to invest in an Equity based mutual fund. Even if the potential for high growth lies, there comes a huge risk. Equities are not for guaranteed/fixed-income Investors. In past times Equity based mutual funds have seen a downfall of up to 30% in a few days. Retail Investors usually rush and make bad moves at rocky times like that in the market.

Then what is in store for Investors you ask,

Let me tell you this upfront, Debt Oriented mutual funds are still doing better, and they are better than FDs for sure, here is a small post about it for your understanding, Debt mutual funds are still better than FD

Now like I already said, it is hard to convince a debt-oriented mutual fund investor to invest in an equity-oriented mutual fund instead, therefore for them there is a middle way which is Hybrid mutual funds.

Hybrid mutual funds:

Hybrid mutual funds as the name suggests are a mixture of Debt as well as Equity Investments.

Based on the percentage of investments in equity out of total investments these funds are classified into three categories:

· Conservative Hybrid Funds (Investments in Equity: 10-25%)

· Balanced Hybrid Funds (Investments in Equity: 50-60%)

· Aggressive Hybrid Funds (Investments in Equity: 65-80%)

Balanced Hybrid mutual funds may be the option a debt-oriented mutual fund investor would consider as it not only gives the indexation benefits but also is not a fully equity-based investment so almost half of their investments still promise a fixed income.

Quant Funds

In addition to the traditional debt and equity mutual funds, there is another type of mutual fund that investors are really talking about these days: Quant funds.

Let me break down what Quant Funds are in the simplest way possible for you:

Quant funds use advanced mathematical models and algorithms to analyse data and make investment decisions. Unlike traditional mutual funds, which rely on human fund managers to make investment decisions, quant funds are managed by computer programs that can analyse vast amounts of data in a matter of seconds. So here stocking picking and buy/sell decisions are taken by this machine and not the fund managers!

Sounds scary right? But these funds are securing all-time high returns in the market for the past 2-3 years and that is why it’s the subject of market discussion these days.

While quant funds may not be for everyone, they offer several advantages over traditional mutual funds. For example, quant funds can make investment decisions based purely on data, rather than emotions or biases. Additionally, because they are managed by computer programs, quant funds can operate with lower fees than traditional mutual funds.

Of course, like any investment, quant funds come with their own risks and limitations. It's important to do your research and understand the investment strategy before investing in any fund, including quant funds.

If you have any questions or thoughts on quant funds or any other type of mutual fund, please share them in the comments section below. I would love to hear from you and engage in a conversation about investing in mutual funds. Don't forget to share this post with your friends and family who may also find it helpful. Happy investing!

Let’s have a look at the Most Asked Question

1.What are the top 10 hybrid mutual funds?

Below are some of the top-performing balanced hybrid mutual funds. Investors are advised to consult a professional before making any investment decision:

1. Invesco India Dynamic Equity Fund - Direct Plan - GrowthDynamic Asset Allocation or Balanced Advantage

2. HDFC Balanced Advantage Fund - Direct Plan - GrowthDynamic Asset Allocation or Balanced Advantage

3. DSP Flexi Cap Fund - Direct Plan - GrowthFlexi Cap Fund

4. Bank of India Balanced Advantage Fund - Direct Plan - GrowthDynamic Asset Allocation or Balanced Advantage

5. ITI Balanced Advantage Fund - Direct Plan - GrowthDynamic Asset Allocation or Balanced Advantage

6. LIC MF Balanced Advantage Fund - Direct Plan - GrowthDynamic Asset Allocation or Balanced Advantage

7. SBI Balanced Advantage Fund - Direct Plan - GrowthDynamic Asset Allocation or Balanced Advantage

8. Mirae Asset Balanced Advantage Fund - Direct Plan - GrowthDynamic Asset Allocation or Balanced Advantage

9. DSP Dynamic Asset Allocation Fund - Direct Plan - GrowthDynamic Asset Allocation or Balanced Advantage

10. Aditya Birla Sun Life Balanced Advantage Fund - Direct Plan - GrowthDynamic Asset Allocation or Balanced Advantage

2.Equity vs debt vs hybrid mutual funds: Which one do you think is better for you?

The selection of a Mutual fund to park the savings of an investor depends on the risk appetite of an investor. In equity vs debt vs hybrid mutual funds, risk-taking abilities are Higher-lower-Moderate risk.

3. What are aggressive hybrid mutual funds?

Aggressive Mutual funds as the name suggests are more invested in Equity of the total fund. Sometimes debt investments are zero of the total funds as well.

4.Are FDs better than Debt Mutual funds?

Despite the amendment of no indexation, debt mutual funds will outperform FDs.

5.Will Debt mutual funds now lose their charm?

There are chances that investors now consider investing in equity-based mutual funds, and in fact, Hybrid mutual funds will be the most favorable option for an investor as there will be 50% debt that is fixed income while 50% equity is risky growth as well. Still, Debt mutual funds are a viable investment option in the market.