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As an investor, the task to choose between equity and debt can be a daunting one. For those who don’t want to miss the returns provided by equity and yet are concerned about market being overvalued, there is one solution. Balanced funds or hybrid funds are a category of asset class that gives exposure to stocks while limiting risk by allocating substantial money in debt securities as well.

Balanced funds, as their name suggests invest their portfolio in a mix of debt and equity instruments with an aim to balance the risk-reward ratio. Their equity components are targeted at generating capital appreciation and their debt components serve as securities to shield the investment from unforeseen market corrections. A calculated combination of debt and equity components makes the funds less vulnerable to market volatility.

Equity Oriented Debt Funds 

Balanced funds can be Equity oriented or Debt oriented depending upon their exposure to equity. If a fund invests at least 65% of its portfolio in equities and rest in debt instruments, it is known as equity oriented debt fund or Equity-oriented hybrid fund. Conversely, if a fund invests more than 65% in debt securities and the remaining in equities it called Debt-oriented hybrid fund. Under equity exposure funds usually invest in shares of listed companies in finance, healthcare, FMCG, Engineering, chemicals, technology, IT etc. Under debt exposure funds usually invest in debt securities like corporate bonds, government bonds and securities, debentures, structured debts, guaranteed loans etc.

Lower Risk, High Yield and Automatic Asset Allocation

Equity-oriented hybrid funds provide one of the best choices available to investors. An investor with moderate risk profile seeking good returns can go for these funds because they provide a cushion of debt when the stock markets fall. However, when the stock market rises, it usually makes up for low-yield environments on the debt instruments, producing dividend yields that are competitive with corporate bond yields. On the top of it, the all-important job of asset allocation is taken care of by a professional and experienced fund manager.

In spite of having lower risk, equity-oriented hybrid funds have been able to give attractive returns consistently over the last few years.

A comparative performance of some best performing equity oriented hybrid funds is given below:

Best Balance Funds

Mutual Fund Name CRISIL Ranking Equity % 1 Year 3 Year 5 Year
SBI Magnum Balance Fund 5 Star 71.94% -6.80% 16.10% 13%
HDFC Balance Fund 4 Star 67% -9.60% 16.10% 13.40%
Tata Balance Fund 4 Star 72% -10.20% 16.60% 14.60%
ICICI Pru Balance Fund 3 Star 73.50% -10.60% 14.60% 13.80%
Birla Sunlife 95 Fund 3 Star 69.84% -9.90% 14.20% 11.60%

Source : CRISIL

 

Tax Efficiency

All the mutual funds with an equity exposure of 65% or more on an average are treated as equity asset class for taxation purpose. So the short term capital gains meaning the gains booked with one year of the equity-oriented hybrid funds are taxed at 15%. If these funds are held for a period more than 12 months, their long term capital gains are taxed at 10% if the gains booked exceed Rs. 1 lakh (as per the latest budget of 2018).

Since debt oriented funds are treated as debt funds only, the long-term capital gains tax is applicable if the fund is held for 36 months or more. The Short-term capital gains are taxed at 20% with indexation benefits. Indexation allows investors to be taxed on returns over and above the inflation rate by adjusting the purchase price of the securities for inflation. In other words, equity-oriented hybrid funds have a clear tax advantage over debt funds despite having considerably low-risk.

Stocks / Mutual Funds – Capital Gains Tax Rates
 

 Type of Security

 

Cut-off Date

Short Term Capital Gains Tax Rate Long Term Capital Gains Tax Rate
Equity Funds / Stocks                                                                 (STCG – units held for less than 1 year  LTCG – units held for more than 1 year) Gains made till 31/1/2018 15% Nil
Equity Funds / Stocks                                                                 (STCG – units held for less than 1 year  LTCG – units held for more than 1 year) Gains made after 31/1/2018

 

15% 10% (If  gains are greater than 1 lakh)

Equity-oriented balanced funds can serve as a viable and lucrative investment avenue for investors with low to moderate risk profile with an investment horizon of 4-5 years. Because they comprise the right balance of wealth accumulation capacity and debt-backed shield against market volatility.

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