Balanced Funds have an overall equity spread of almost 65% either in the large, mid or small cap stocks.
Navneet Dubey | Apr 04, 2018 11:27 AM IST | Source: Moneycontrol.com

Balance funds are the funds which have exposure to two main asset classes – equity and debt. This fund gives you exposure to stocks as well as money market instrument. These funds have the equity orientation as around 65% of your monies get invested in equity and remaining 35% in debt funds. The risk associated towards equity exposure is almost of the same amount as the risk is associated with any normal equity fund do have. So, are these balanced mutual funds really ‘balanced’ enough? SEBI has recently proposed to change the name of the balanced fund into three categories – Aggressive Hybrid Fund, Balanced Hybrid Fund and Conservative Hybrid Fund.

We bring you the main features of balanced funds and tell you how to go about making the most of your investment in them:

What does the equity spread consist of?

Balanced funds have an overall equity spread of almost 65% either in the large, mid or small cap which can be extended even towards micro-cap funds. Having flexibility towards too many categorisations, the fund manager gets the liberty to choose stocks, however, that may welcome more risk to your portfolio. Therefore, check the holdings before investing in these balanced funds as the range between mid-caps to micro-cap can be risky if you are a conservative investor.

What are new balanced funds?

As per the regulator (SEBI), the categorization of these balanced funds will get further differentiated into various sub-heads to provide more clarity to mutual fund investors. These can be termed as follows:

The Aggressive Hybrid Fund: It will invest in equities & equity related instruments between 65% and 80% of total assets and debt instruments between 20% and 35% of total assets.

The Balanced Hybrid Fund: It will invest in equities & equity related instruments between 40% and 60% of total assets and debt instruments between 40% and 60% of total assets. However, no arbitrage would be permitted in the scheme.

The Conservative Hybrid Fund: It will invest in equities and its related instrument between 10% to 25% of overall assets and debt instruments between 75% and 90% of total assets.

Other hybrid funds which investors can further look to make investments can be – Arbitrage fund, Dynamic asset allocation fund and Multi-asset allocation funds.

To provide more clarity to investors, these new categories of balanced funds termed as new types of hybrid funds will help investors to understand their funds in a much better way. Not only this, fund managers will also get clarity to structure their fund as per new rules, getting clear direction as to which stocks to select while designing the scheme. Hopefully, in future, there may be no room for confusion while selecting balanced funds for investing and switching between high risky to a less risky portfolio.

Tax treatment: Debt and equity-oriented funds

Currently, all the balanced funds today are having an average exposure of 65% to equities, they come under the ambit of equity oriented fund. However, in future the new conservative hybrid funds can get debt tax treatment as more of the exposure is tuned towards debt asset class.

However, in overall mutual fund taxation structure, equity funds and debt funds are taxed as below:

Equity Oriented Fund

LTCG: There is no long-term capital gain tax on equity funds after one year if gains do not exceed Rs 1 lakh. However, if capital gains exceed Rs 1 Lakh, the realised amount will get taxed at 10%.

STCG: Short-term gains are taxed at 15%. Where gains are realised within one year.

Debt Oriented Fund

LTCG: These mutual fund schemes are taxed at 20% long-term capital gain tax and

STCG: When realised within 3 years, these are taxed at marginal tax rate where a maximum taxation of 30% can be applied to short-term capital gain tax for both Resident Individuals & HUF.

Source: https://bit.ly/2qhYwFj