For a long time, debt funds have been a favourite among investors for their relatively stable returns and long-term taxation benefits. However, according to the new rule, which was effective from 01 April 2023, debt funds will no longer enjoy the lower effective taxation rate. Instead of a long term capital gains tax rate of 20% plus indexation benefits, debt funds will now be taxed at the effective income tax rate.
Experts are suggesting that hybrid funds could become an alternative to debt funds. This type of fund invests in equity as well as debt. It provides the best blend and more significant yields than an ordinary debt fund. Hybrid funds are generally safer than equity funds.
Can hybrid funds offset new debt fund tax?
• Recently, fund houses had gone on an overdrive recommending that investors put as much cash into new debt funds
• Numerous experts express that some individuals (post April 2023) might feel compelled to avoid investing in debt funds to avoid taxes
• Hybrid funds are less risky, especially when the investment horizon is over three years. Less risky does not, however, have the same level of risk as debt funds. Hybrid funds are a substitute but come with some risk
Should you use hybrid funds to offset the new debt fund tax?
The hybrid funds diminish the new debt fund tax for the following reasons:
• Hybrid mutual funds permit investors to determine an equilibrium between risk and return
• It permits investors to explore different avenues regarding exceptional yield value ventures by padding them with additional anticipated profits on debts
• For instance, arbitrage assets can additionally bring down the risk tolerance of the investment
• Hybrid funds are known for risk allocations due to their properties of combining both debt and equity. By investing in various resources, individuals limit the openness to risk factors in any single asset
• Hybrid funds can offset new debt funds by returns earned through debt instruments. Hybrid funds have the property of counterbalancing the fluctuations in the equity market
• Allocations of mixed assets further divide risks by disseminating them in different business sectors • There is also the factor of volatility in the equity market. In a fluctuating market, hybrid funds can assist you overcome the volatility in an adaptable way
• As mentioned earlier, hybrid fund functions as both an equity and a debt fund. Taxes on capital additions earned from hybrid funds are at par with equity or debt funds
• It depends on the hybrid fund structure. Suppose the exposure of equity reserve is at more than or up to 65%. In that case, taxation is done precisely like an equity fund. Otherwise, taxation will be done according to the debt fund laws
What is the new set of rules enacted by the government regarding mutual funds?
• After 1st April 2023, any mutual funds additions bought will be treated as short-term capital gains
• For some mutual funds, merchants and advisors, the arrangement is to put resources into hybrid funds, which are treated as equity for taxation
• Those hybrid assets with over 65% of their corpus in value will be charged at 10%.
Now that you know about hybrid funds and the changes made by the government regarding the taxation of debt mutual funds you can now select a fund that best suits your needs. You can choose from our recommended funds on page 38. With the new laws enacted by the government, investing in hybrid funds provides many benefits to investors. Indeed, investors can use hybrid funds to offset the new debt fund tax.
