SEBI’s New Proposal: What Hybrid Passive Funds Mean for Investors? Will it Benefit them?
SEBI’s Proposal for Hybrid Passive Funds
The Securities and Exchange Board of India (SEBI) has proposed the introduction of hybrid passive funds in its recent consultation paper. While India already has active hybrid funds in various categories, current regulations only allow passive funds based on either equity or debt index. This proposal aims to introduce passive hybrid funds. Investors can invest in single product that combines both equity and debt instruments.
Understanding Hybrid Funds
Hybrid funds aim to balance capital growth and reduce volatility. Currently, active hybrid funds in India manage Rs.2.33 lakh crore in assets across three categories. Aggressive hybrid funds, conservative hybrid funds and balanced hybrid funds. If the consultation paper is approved, fund houses can launch hybrid index funds or exchange-traded funds. This provides more flexibility and diversification for investors.
Types of Passive Hybrid Funds
SEBI has proposed three types of passive hybrid funds:
1. Debt-Oriented Passive Hybrid Fund: Limits equity investment to 25% with 75% in fixed-income securities.
2. Balanced Passive Hybrid Fund: Allocates 50% to both equity and debt.
3. Equity-Oriented Passive Hybrid Fund: Invests 75% in equity, 25% in fixed-income securities.
Index Choices for Hybrid Passive Funds
For the equity portion of these funds, only broad-based indices from the top 250 companies by market capitalization will be used. This includes indices like Nifty50 Nifty100 and Nifty200. Nifty Midcap150 and Nifty LargeMidcap 250. For the debt portion, SEBI suggests using constant-duration debt indices. Sectoral or thematic indices for equity and target maturity funds for debt will not be allowed.
Benefits of Passive Hybrid Funds
No Fund Manager Risk
One key advantage of passive hybrid funds is the absence of fund manager risk. Active hybrid funds require investors to choose the right fund manager each year. This can be challenging. Passive hybrid funds, however, follow the set index. They eliminate this risk.
Tax Efficiency
Hybrid funds especially aggressive ones, offer tax-efficient asset allocation. These funds maintain 65% to 75% in equities and the rest in debt. They rebalance automatically. This internal rebalancing does not trigger tax liabilities for investors. The equity portion is taxed favourably with a 10% long-term capital gains tax.
A Wait-and-See Approach
SEBI’s proposal for hybrid passive funds could be a game-changer for investors seeking passive investment options. However, it’s wise to wait and see which specific funds are launched and the indices they will follow before making any investment decisions.
