Balanced funds – When should you invest in these funds?

First of all, let me make clear that there is no longer a category of Balanced funds in Mutual funds. Even earlier also, though the term balanced funds are used, they were not balanced in structure, as they were skewed towards the equity side, so to provide the Equity Taxation.

Now Post recategorization of the Mutual funds, all such mixed structured has come under the Hybrid category. And now, it is very much clear and visible to the investor as to what kind of Hybrid structure one is getting into.

So before going ahead, it is important to understand the New Avatars of balanced funds in the form of Hybrid funds.

Post Recategorization of Mutual funds by SEBI, all the balanced Funds which used to have Higher equity allocation (Min 65%) have moved to a category of Hybrid Funds – Aggressive; and another new category has launched as Hybrid Funds – Balanced, in which the equity allocation will remain in the range of 40%-60%.

It is crucial to note that for capital gain taxation to fall under equity tax rules, a mutual fund’s equity allocation should be 65% and above. Consequently, aggressive Hybrid funds will be treated as Equity funds from a taxation perspective. On the other hand, the Hybrid-Balanced funds category, with equity allocations ranging from 40% – 60%, will be subjected to debt investment tax rules, which says that Short-term capital gain is added in the total income of the investor and Long-term capital gain be taxed at 20% post indexation.

To come up with some solution on this front and to provide investors with Equity taxation with better risk and return management, 2 new categories were introduced which are balanced Advantage or Dynamic Asset Allocation funds, and Equity savings funds.

In the Balanced advantage fund, the investment structure is such that the Equity allocation remains in the range of 30%-80%. To maintain the minimum equity exposure of 65%, these funds make use of equity derivatives. Balanced advantage funds use PE/PB or in-house structure or active management based rebalancing approach to increase or decrease the direct equity exposure in the portfolio.

This category of funds is expected to manage the portfolio in such a way so as to reduce the equity in the high valuation market and increase the exposure when the market is on low valuation. So, in Short, the balanced advantage funds give the taste of both Aggressive Hybrid and Balanced hybrid. But is neither aggressive nor balanced.

So, in comparison to aggressive, it may not yield that high over a longer period of time, i.e. when equity is expected to perform better, but in falling times it is expected to fall less.

Equity savings funds were launched in comparison to the Conservative Hybrid funds. As in Conservative hybrid funds, the maximum Equity exposure cannot go beyond 25%, so it again comes under Debt taxation. In Equity savings funds, just like balanced advantage funds, equity exposure is managed through equity derivatives but the direct equity exposure remains up to 30-35%.

Balanced funds / Hybrid funds – When should you invest in these funds?

I feel this is a beautiful category for the First-timers or DIY Investors. Since I believe in all probability these investors won’t be following the Asset Allocation approach. So, these balanced funds will serve the purpose of managing the Risk and return aspect for them.

Besides this when you are targeting a single goal, a few years away, then also you may consider these kinds of funds. Depending on how far your goal is. If it is 3 years away then you may consider Conservative Hybrid or Equity savings, and if it is 5 years away then Aggressive balanced / Balanced advantage may work better. During Retirement years these funds work well through bucketing strategy.

Taxation wise, now Equities are also taxable. Though where the complete long-term capital gains in Debt is taxable, in Equity the first Rs. 1 Lakh of gain is tax free. However, the Indexation benefit reduces debt taxation considerably.

When considering the taxation aspect of balanced funds, it’s important to also factor in the expenses associated with the fund. The Returns being shown in the above tables are of category average and not of specific funds and are Post expenses.

If you go deeper into the fund management style and structure, you may find a fund with a good strategy and stable management, which may suit well for your requirements. But before that, you have to zero on to the category, and I hope this article helps you in that.

In case you have any queries on Balanced fund / or a hybrid structure, please ask in the comments section below.