Balanced mutual funds skew kitty towards equity

Move aimed at getting tax sops.

Balanced mutual funds, whose portfolio are usually not tilted towards equities, are now hiking their equity allocation to continue getting tax sops available to equity funds.

Seven of the hybrid mutual funds have recently altered their equity allocation to fit into the definition of equity oriented funds revised in this year's Union Budget.

The move is to ensure that the funds continue to avail beneficial tax treatment available to equity-oriented mutual funds.

This year's Budget had hiked the minimum equity allocation level in a mutual fund scheme to 65 per cent for it to qualify as an equity-oriented fund compared with 50 per cent level specified earlier. The new definition is effective from 1 June.

"While investors would enjoy the beneficial tax treatment, the change in the asset allocation means that balanced funds are getting less balanced," said Dhirendra Kumar, CEO, Value Research, which tracks the mutual fund industry.

For example, Pru ICICI Blended Plan A has barely invested more than 52 per cent in equities, but in its revised allocation it would need to invest at least 65 per cent.

LIC's Balanced and ULIS scheme are already heavily tilted towards equity with allocation of about 70 and 78 per cent respectively. Historically, funds which market themselves as equity funds invest 80-90 per cent in equity.

The tax treatment is substantially tilted towards equity funds as they are exempt from the 12.5 per cent dividend distribution tax and are subject to lower rate of short term capital gains tax of 10 per cent.

They are also exempt from long term capital gains tax. Of the remaining funds, Pru ICICI Balanced invests about 68 per cent in equity and its Child Care - Gift Plan has also steadily hiked its equity exposure to about 68 per cent.