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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 the market being overvalued, there is one solution – balanced funds or hybrid funds. This asset class gives you exposure to stocks while limiting risk by allocating substantial money in debt securities.
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. Balanced funds can be equity-oriented or debt-oriented, depending on their exposure to equity.
If a fund invests at least 65% of its portfolio in equities, then 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 equity, it is called a 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 typically invest in debt securities like corporate bonds, government bonds and securities, debentures, structured debts, guaranteed loans, and so on.
An investor with a moderate risk profile seeking good returns can go for equity-oriented debt 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 top of it, the all-important job of asset allocation is taken care of by a professional and experienced fund manager.
It is tough to decide how much one should invest or allocate to an asset class, and when to do so. Not all investors are willing to invest all their money in a single basket of products. They can choose balanced funds instead, which will offer the benefits of diversity and asset allocation within a single structure. The equity component of a balanced fund will help in delivering long-term returns, while the debt component of the fund will add stability to your portfolio. This diversification will also cushion the portfolio from market risks if either equity or debt enters a bear phase (a downside).
Your fund manager will work to ensure that no matter what the market scenario, you always utilise the best option. So, when the markets are high, the fund manager will sell equity to maintain the maximum level. Conversely, when markets are low, the fund manager will buy equities to sustain the equity levels. This mandatory discipline, followed by a fund helps investors who put their money in balanced funds get good returns in the long run. Now, among the array of balanced funds on offer, the equity-oriented hybrid funds provide one of the best choices available to investors.
Despite having lower risk, the equity-oriented hybrid funds have been able to give attractive returns consistently over the last few years. Comparative performance of some best-performing equity-oriented hybrid funds is given below:
|Mutual Fund Name||CRISIL Ranking||Equity %||1 Year||3 Year||5 Year|
|SBI Magnum Balanced Fund||5 Star||0.7194||-0.068||0.161||0.13|
|HDFC Balanced Fund||4 Star||0.67||-0.096||0.161||0.134|
|Tata Balanced Fund||4 Star||0.72||-0.102||0.166||0.146|
|ICICI Pru Balanced Fund||3 Star||0.735||-0.106||0.146||0.138|
|Birla Sunlife 95 Fund||3 Star||0.6984||-0.099||0.142||0.116|
All the mutual funds with an equity exposure of 65% or more on an average are treated as an 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 the 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, the equity-oriented hybrid funds have a clear tax advantage over debt funds despite having low-risk considerably.
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.
|Type of Security||Cut-off Date||STCG Tax Rate||LTCG 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)|