Balanced hybrid funds: Mitigate risks and earn stable investment returns

Remember these funds have a limited track record currently; they will also not receive equity tax treatment

WhiteOak Capital Asset Management Company (AMC) has launched the new fund offer (October 5 to October 19) of its balanced hybrid fund. This is a nascent category with only one other fund that belongs to 360 ONE (asset under management is Rs 378 crore).

How does the category work?

According to the Securities and Exchange Board of India’s (Sebi) definition, balanced hybrid funds must maintain a 40-60 per cent allocation to equity and equity-related instruments.

Allocation to debt instruments can be in the same range. No arbitrage is permitted. A fund house is allowed to offer either an aggressive hybrid or a balanced hybrid scheme.

White Oak Capital Balanced Hybrid Fund (WBHF) will initially allocate an equal amount to equity and debt. If market movements cause the equity allocation to change, the fund manager will rebalance and bring it back to 50 per cent.

Says Manuj Jain, associate director and co-head product strategy, WhiteOak Capital AMC: “This fund is a simple, yet effective way, to participate in both equity and debt asset classes, wherein equity provides higher wealth creation opportunities in the long-term and debt provides stability to the portfolio. The scheme aims to achieve reasonable returns over time while reducing the intermittent volatility associated with pure equity allocation.”

Limited volatility

While equities have the ability to deliver high returns over the long term, many investors, especially newer ones, tend to panic and exit when the market tanks. Due to this behavioural pattern, they are unable to enjoy the high returns equity funds can offer.

A balanced hybrid fund may be better suited for them. Says Jain: “Many investors are looking to enter the equity market but are wary of markets— events, levels, volatility, and so on. One simple but effective strategy to follow is the balanced approach of having growth asset (equity) and stability (debt) in the portfolio.”

Many investors also fail to maintain proper asset allocation, which eventually determines portfolio returns.

“This fund will provide automatic asset allocation to moderate risk investors,” says Parul Maheshwari, a certified financial planner. The fund manager will rebalance the portfolio and this won’t give rise to tax incidence.

Experts are optimistic about the category’s prospects.

“The outlook for the Indian economy over the next few years appears sound. Interest rates may also start cooling down after a few years. Hence, both the asset classes in a balanced hybrid fund have the potential to deliver returns,” says Ravi Kumar TV, founder, Gaining Ground Investment Services.

Will not get equity tax treatment

Most fund houses offer aggressive hybrid schemes. With their minimum 65 per cent allocation to stocks, they are treated as equity funds for tax purposes. 

Capital gains earned on the sale of units held for more than one year are taxed at 10 per cent, once the capital gains exceed Rs 1 lakh in a year.

A balanced hybrid fund with its 40-60 per cent equity allocation will not receive this tax treatment.

Capital gains earned on the sale of units held for more than three years will be taxed at 20 per cent with indexation benefit. 

Units held for a shorter period will be taxed at slab rates. (Their treatment will, however, be better than that of a conservative hybrid fund or a pure debt fund.)
 

Should you invest?

Many investors will find this category suited to their needs. Says Maheshwari: “First-time investors or conservative investors looking to start investing in equities may consider it. Those overweight on mid- and small-cap funds, looking to book profits in line with their asset allocation and allocate towards large-cap stocks and debt, could also consider it.”

The category is young and has only two funds. Wait for some time until they develop a track record.

Two other categories of hybrid funds with static allocation—aggressive and conservative—are also available.

“Consider factors like financial goals, risk tolerance and time horizon when selecting a category,” says Ravi Kumar TV. 

Those with a higher risk appetite and longer investment horizon should go for a category with a higher equity allocation.