'Since the category has a limited track record, assess the fund manager's experience across equity and debt market cycles rather than relying only on past returns.'
The Securities and Exchange Board of India has revised its mutual fund scheme categorisation framework, allowing asset management companies (AMCs) to offer both balanced hybrid and aggressive hybrid funds and giving investors more choice in the hybrid fund category.
ICICI Prudential Mutual Fund and SBI MF have recently launched balanced hybrid funds, while UTI, Kotak, and Baroda BNP Paribas MF are likely to launch theirs soon.
Key Points
- Sebi's revised framework now allows asset management companies to offer both balanced hybrid and aggressive hybrid funds simultaneously.
- Balanced hybrid funds invest 40 to 60 per cent in equity and debt each, offering diversification through automatic portfolio rebalancing.
- These funds do not qualify for equity taxation because equity exposure can fall below the 65 per cent threshold.
- Experts recommend evaluating debt quality, duration, expense ratios and fund manager experience before investing in this category.
- Balanced hybrid funds suit moderate-risk investors, first-time equity investors and those nearing retirement with a three-to-five-year horizon.
Sebi's New Hybrid Fund Rule
"Until recently, an AMC could offer either a balanced hybrid fund or an aggressive hybrid fund, but not both.
"Most fund houses opted for the latter. Under Sebi's revised framework, AMCs can now offer both categories, subject to prescribed limits on portfolio overlap," says Ranjit Bhatia, head of investment risk and product strategy at WhiteOak Capital.
"This has prompted several fund houses to launch balanced hybrid schemes for the first time," Bhatia added.
How they invest
A balanced hybrid fund must invest 40 to 60 per cent of its portfolio in equity and 40 to 60 per cent in debt. It cannot allocate to arbitrage.
Thus, these funds invest less in equities than aggressive hybrid funds, which are allowed to take a 65 to 80 per cent exposure.
Benefits and drawbacks
On the positive side, balanced hybrid funds offer a disciplined 40 to 60 per cent equity allocation, while debt provides a cushion against market volatility.
The fund manager handles rebalancing, so investors get diversification and a balanced equity-debt mix without having to manage asset allocation themselves.
Tax Rules Investors Should Know
On the negative side, since equity exposure can fall below 65 per cent, these funds do not qualify for equity taxation.
The category has a limited track record.
"Returns may be lower than those of aggressive hybrid or pure equity funds because of the 60 per cent equity cap," says Bhatia.
"Balanced hybrid funds can underperform aggressive hybrids in certain market conditions, particularly when rising interest rates hurt both equity and debt markets," adds Souvik Biswas, head of research, Bajaj Capital.
Bhatia points out that these funds carry equity market and interest-rate risks and should not be regarded as capital-protection products.
Checks before you invest
Review the debt portfolio's credit quality, duration and interest-rate sensitivity.
Assess rebalancing practices across schemes.
Also compare expense ratios, as costs can affect returns.
"Since the category has a limited track record, assess the fund manager's experience across equity and debt market cycles rather than relying only on past returns," says Bhatia.
Who Should Invest?
Balanced hybrid funds suit investors with a moderate risk appetite who want meaningful equity participation without taking on the full volatility of a pure equity fund.
"Their key distinction is discipline: Unlike aggressive hybrid funds, which can behave more like equity during market falls, or balanced advantage funds, where the manager can dynamically change equity exposure, balanced hybrid funds must stay within a 40-60 per cent equity band," says Manish Jain, deputy CEO, Choice Mutual Fund.
This makes them suitable for investors who seek a predictable, rule-based mix, particularly first-time investors who want to ease into equity and those nearing retirement.
"They can be considered by investors around seven years from retirement who want to gradually reduce equity risk while retaining some growth potential," says Biswas.
These funds may not suit high-risk investors who seek higher equity-driven returns.
Aggressive hybrid or equity-oriented funds may be more appropriate for such investors.
"They may also be less suitable for investors looking for short-term investments or tactical asset allocation, given the 24-month holding period for long-term capital gains (LTCG) and the fund's fixed 40 to 60 per cent equity range," says Biswas.
Investors should ideally stay invested for a minimum of three years, though five years or more is ideal.
"Investing for less than three years may expose investors to market volatility without giving the equity portion enough time to recover and compound," says Bhatia.
How these funds are taxed
- Holding period must be more than 24 months for gains to qualify as long-term capital gains (LTCG).
- LTCG is taxed at 12.5 per cent without indexation.
- Holding period of 24 months or less qualifies as short-term capital gain (STCG).
- STCG is taxed at the applicable income-tax slab rate.
- Gains do not qualify for the Rs 1.25 lakh LTCG exemption associated with equity-oriented funds.
- Income distributed under the IDCW (income distribution cum capital withdrawal) option is taxable in the investor's hands at the applicable tax rate.
Disclaimer: This article is meant for information purposes only. This article and information do not constitute a distribution, an endorsement, an investment advice, an offer to buy or sell or the solicitation of an offer to buy or sell any securities/schemes or any other financial products/investment products mentioned in this article to influence the opinion or behaviour of the investors/recipients.
Any use of the information/any investment and investment related decisions of the investors/recipients are at their sole discretion and risk. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Opinions expressed herein are subject to change without notice.
Feature Presentation: Ashish Narsale/Rediff
