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    What are balanced funds?

    Synopsis

    Before the Sebi categorisation and rationalisation of mutual fund schemes in October 2017, most investors and advisors used to refer to equity-oriented hybrid schemes as balanced schemes.

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    What are balanced funds? The answer to that question would depend on whom you are asking it. Most old timers – be it mutual fund advisors, fund managers, or investors – would refer to aggressive hybrid funds as balanced funds. The new investors and advisors would refer to balanced hybrid funds.

    Confused?

    Well, before the Sebi categorisation and rationalisation of mutual fund schemes in October 2017, most investors and advisors used to refer to equity-oriented hybrid schemes as balanced schemes. To qualify as equity-oriented schemes and to get long-term capital gains tax benefit, it is mandatory to invest at least 65% in Indian stocks. So, these schemes used to invest mostly in equity. In other words, the equity and debt were not in perfect balance in these schemes. They were simply called balanced schemes.

    However, the Sebi norms almost three years ago made the life of mutual fund investors easier. As per the new norms, there are balanced hybrid schemes and aggressive hybrid schemes. Balanced hybrid schemes have the mandate to invest 40-60% in equity or debt. No arbitrage position is permitted in these schemes. Aggressive hybrid schemes have the mandate to invest 65-80% of the corpus in equity and 20-35% of the corpus in debt. A mutual fund house can offer either a balanced hybrid scheme or an aggressive hybrid fund. They cannot offer both the schemes.

    Now that you know the difference between a balanced fund and aggressive hybrid fund, who do you think they are meant for? Well, as you can see, a balanced hybrid scheme has a lower allocation to equity and the allocation to debt can also be more or less the same. So, this is meant for investors with conservative risk profiles. Investors who want to take an equal amount of exposure to equity and debt. Regular balancing of the portfolio would help to realise profits and enhance return over a long period.

    Since these schemes would be considered as debt schemes for the purpose of taxation, the fund manager can also reduce the allocation to equity to minimum 40% in adverse market conditions. Note, these schemes would be taxed like debt schemes. That means, if you sell your investments in these schemes before three years, the returns would be added to your income and taxed as per your Income Tax slab. If you sell the investments after three years, returns would be treated as long term capital gains and taxed at 20% with indexation benefit.

    Aggressive hybrid schemes, on the other, invest mostly in equity and they are treated as equity schemes for taxation. If you sell your investments in these schemes before a year, you will have to pay a short term capital gains tax of 15%. If you sell your investments after a year, returns will be taxed at long term capital gains tax of 10%.



    The Economic Times