DDT may tilt the scales against balanced funds

The popularity of balanced schemes may wane among investors as a Budget proposal to impose a dividend distribution tax (DDT) of 10% on dividend declared by equity-oriented mutual fund schemes could reduce the flows into this category.

Investors had poured money into dividend plans of balanced funds -- which invest in a mix of equities and bonds — in recent months, partly because of the informal assurances of a fixed payout by fund houses every month. Rising stock markets also attracted the funds as investors sought to cut their exposure in shares.

“Investor preference for the dividend option will reduce as there’s a compulsory dividend distribution tax of 10%. Compared to this, in the growth option, gains up to ₹1 lakh per annum are exempt from LTCG,” said Kaushtubh Belapurkar, director (fund research), Morningstar India.


Many balanced funds have been paying monthly dividend, giving investors an annualised yield of anywhere between 8 and 12%.

HDFC Prudence, ICICI Balanced, UTI Balanced, L&T Prudence, Kotak Balanced, Tata Balanced, DSP BlackRock Balanced are some of the funds that have been paying monthly dividend, while HDFC Balanced, Birla Balanced and SBI Balanced have been paying dividend quarterly. This has attracted investors looking to earn tax-free dividend and wanting regular cash flows into these funds.

“This explosive growth in assets has been driven largely by implicit promises of regular monthly dividends in balanced funds,” said Kunal Bajaj, founder and CEO, Clearfunds.com.He believes that many first-time investors who should have opted for funds with lower equity exposure have been lured into balanced funds with aggressive equity exposure where dividend yields were high.

Average size, or assets under management of balanced fund, has grown twelve fold in five years from ₹417 crore to ₹5,092 crore in December 2017.

The size of a balanced fund is now twice the size of the average large cap equity fund at ₹2,396 crore, said a study by clearfunds.com. Five years back, the average size of a large cap fund was ₹ 694 crore.

With equity valuations high, investors have been hesitant to invest in pure equity funds, and preferred to allocate to balanced funds in 2017.

Of the various categories that come under hybrid funds, equityoriented balanced funds have a 65-75% equity exposure, dynamic asset allocation funds have between 30 and 80% in equity, while equity savings funds have about 20-45% allocation to equity, with the rest in debt and arbitrage products.