Why do investors ignore balanced hybrid mutual funds?

Schemes that are mandated to invest 40-60 per cent in debt or equity is still not popular among mutual fund investors.

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Most mutual fund participants continue to refer to aggressive hybrid schemes, now a legitimate category as per Sebi classification, as balanced funds. In fact, there is nothing balanced about these hybrid schemes that are mandated to invest around 65-80 per cent of the corpus in equity and 20-35 per cent of the corpus in debt instruments. However, the name seems to have stuck. It is extremely misleading because we now have a Sebi recognised balanced hybrid scheme category available in the country.

However, these schemes that are mandated to invest 40-60 per cent in debt or equity is still not popular among mutual fund investors and advisors. Mutual fund advisors list reasons like taxation, Sebi's stringent norms, lack of open-ended schemes, among others, as to why these schemes have not found favour among the mutual fund community.

Many mutual fund participants point to the taxation of balanced hybrid schemes as the biggest damper that is harming the cause of these schemes. As said before, a balanced hybrid category is mandated to invest 40-60 per cent in equity or debt. Because of this investment mandate, these schemes would be treated as debt schemes for the purpose of taxation. A mutual fund scheme should invest at least 65 per cent in Indian stocks to be treated as an equity mutual fund scheme for taxation.


“Hybrid balanced category can go to maximum 60 per cent in equities. Investors argue that if going 5 to 10 per cent extra in equities can provide them with the taxation benefits, why they would go for the balanced category which follows the taxation of debt,” says Jitendra Solanki, founder, JS Financial Advisors. "There is no demand for this category from investors," he adds.

Gains in balanced hybrid funds held for less than three years are treated as short term capital gains and will be added to the income and taxed as per the income tax slab applicable to the investor. Long term gains on units held for more than 36 months are taxed at the rate of 20 per cent after providing for indexation.

Equity schemes have a favourable taxation regime in comparison. If equity mutual funds are held for more than a year, they qualify for long-term capital gains tax of 10 per cent. Gains of up to Rs 1 Lakh in a financial year are tax-free. If these schemes are held for less than a year, gains are treated as short term capital gains and are taxed at 15 per cent.

Advisors also point out that there are no open-ended balanced hybrid schemes available to investors. Most of the schemes in the category currently are close-ended schemes. However, most of the solution-oriented schemes, including retirement, pension, and child-oriented schemes, follow the balanced hybrid investment mandate.
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SEBI in its circular dated October 06, 2017 on mutual fund categorisation stipulates that a mutual fund house is permitted to offer either an aggressive hybrid fund or a balanced fund. Since almost every mutual fund house has an aggressive hybrid scheme in its bouquet, they cannot offer a balanced hybrid scheme.

Mutual fund advisors believe the conservative investors who want a lower exposure to equities would rather opt for conservative hybrid funds rather than going for 40 to 60 per cent in equities with balanced funds.

“Conservative investors would rather choose a conservative hybrid scheme which allocates 10 to 25 per cent to equities and remaining to debt,” says Shweta Jain, founder, Investography. Otherwise, the equity and debt allocation can be done by opting for equity and debt funds separately. "We prefer managing the equity and debt allocation actively for investors and thus ask investors to go for pure equity and debt funds as per the risk appetite," she adds.

Hybrid funds are meant for investors who do not want to actively manage their asset allocation between equity and debt. If an investor is going through an advisor, it can take care of the equity and debt allocation for the investor.

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