How To Select Balanced Schemes After Re-categorization Of Mutual Funds? – MoneyMindz

By | 21/07/2018

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Recently, the Securities and Exchange Board of India mandated a mutual fund re-categorization. Hence, from now onwards, balanced funds will be called Hybrid Funds.

Hybrid schemes will invest inequity assets and debt assets, in fluctuating measurements. Divergent categories of hybrid funds followed by the standardization of the allocation of these mandates have been made. There won’t be an extensive change in the elementary aspects of the schemes. Selecting appropriate schemes based on one’s goal and risk profile will become easier.

Let us first know what a balanced fund is.

A balanced fund comprises of a stock component, a bond component and at times, a money market component, in a particular portfolio. These hybrid funds usually stay with a constant mixture of stocks and bonds which indicates either a moderate or high equity, component or conservative, higher fixed-income or component orientation. Balanced funds are for investors who want a mix of safety, income and capital appreciation.

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What alterations have occurred?

The asset allocation pattern to invest across equity and debt of former balanced funds was not mandated in the days gone by. According to Roopali Prabhu, “While there was no such mandate earlier, in practice most balanced funds did carry exposure to equity between 65 percent and 80 percent and hence the re-categorization hasn’t changed much”.

How do you select balanced schemes at present?

There are two categories:-

1. Balanced Hybrid (BH)

If you are seeking considerable allocations to equities, you can opt for a fund from the Balanced Hybrid category. This is an open ended scheme which invests in equity and debt instruments. Here, equity allocation is supposed to be between 40% and 60% of total assets while the allocation for debt instruments is supposed to be between 40% and 60% as well.

2. Aggressive Hybrid (AH)

If you are seeking a scheme which broadly invests in equity, Aggressive Hybrid category suits you. This is an open ended hybrid scheme which invests in equity. Equity allocation is supposed to be between 65% and 80% of total assets while the allocation for debt instruments is supposed to be between 20% and 35%. However, if you want regular income in short to medium term, avoid this scheme. This scheme is for long term wealth creation and has limited volatility compared to pure equity.

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Taxation of hybrid schemes:-

The tax treatment of profits acquired from equity funds differs from profits acquired from non-equity or debt funds. The fund where equity allocation is above 65% of total assets can be considered an equity fund. Tax advantage on long term gains will be there only in Aggressive Hybrid Mutual Fund Schemes due to larger equity portion, as compared to Balanced Hybrid Mutual Fund Schemes.

When you are about to invest the next time, or when you know someone who wants to invest, if equal balance between equity and debt or a predominantly equity scheme is what the investor is looking for, you know what to consider. You will have to view the fund fact sheet to have a look at its portfolio to see if asset allocation differs (it does, often!)

Never pick up one scheme blindly. Do your own research diligently and choose what’s best for you. You can always talk to reliable and certified financial advisers at www.moneymindz.com or by giving a missed call to 022-62116588.

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