Hybrid debt-oriented funds do not qualify to be equity funds

These mutual funds invest between 75% and 90% in debt instruments, and the remaining in the equity market


Hemant Mishra/Mint
Hemant Mishra/Mint

Should I invest in these funds for the long term: Tata Equity Opportunity Fund Plan B -Growth; UTI MNC Fund-Growth; ICICI Prudential Export and Other Services Fund-Growth; and Birla Sun Life Long Term Advantage Fund?

—Bhargab Dutta

The set of funds makes for a curious mix. I tried to understand how you arrived at this list, but at the end, I could not quite figure it out. Two of the funds are diversified funds, and two are thematic. Two are rated, while the other two are not. The only common factor that I could see is that they are all equity funds from large fund houses.

Putting together an equity fund portfolio for the long term requires a more structural approach. Prior to choosing the actual funds, one needs to determine the category of funds, and the proportion of money to allocate to each category. For example, a good, long-term mutual fund portfolio with four schemes would have a large-cap fund, a diversified fund, and a couple of small- and mid-cap funds. The large-cap and diversified funds would get 30% of the allocation each, and the rest 40% would be split between the two small- and mid-cap funds.

Once this structure is decided, one has to identify good schemes with consistent performance in each category. For example, even if we stay mostly with the fund houses that you have chosen in your portfolio, a good set of funds would be ICICI Prudential Focused Blue Chip (large-cap), Birla Sun Life Frontline Equity Fund (diversified), UTI Mid-Cap, and HDFC Mid-Cap Opportunities (small- and mid-cap).

How are hybrid debt-oriented mutual funds taxed?

—Kashish Gujral

Hybrid debt-oriented mutual funds invest between 75% and 90% in debt instruments, and the remaining in the equity market. Such funds go by various names such as monthly income plans, income savings funds, conservative asset allocation funds, and others. Some of the child savings funds and retirement savings funds would also belong to this category. Basically, these funds invest in debt and the equity markets, but their investment in debt is more than in equities.

Only funds that invest at least 65% of their corpus in the domestic equity market qualify for treatment as equity mutual funds. So, these funds will not qualify in that regard. Given the structure of these funds, gains from investing in them are taxed as if they are debt mutual funds. Redemption proceeds if investing period is less than 3 years would be considered as short-term gains and taxed as regular income (according to your tax slab). If the investing period is longer (more than 3 years), the gains will be considered as long-term gains and get the benefit of indexation. The taxation would be 10% of the gains without indexation (11.33% after surcharge and cess), and 20% after indexation (22.66% after surcharge and cess).

Queries and views at mintmoney@livemint.com

READ MORE