A reader asks, “Dear sir, can you please let us know the list of mutual funds that invest 50% in equity and 50% in bonds? I ask this after reading your article – Will Benjamin Graham’s 50% Stocks 50% Bonds strategy work for India?”
Such a fund can serve as an efficient one-fund portfolio option (particularly if it tracks equity and debt indices, eliminating fund manager risk) with the right balance between the reward and stability. Though such a fund will be taxed as a non-equity fund (see below), effort-free, tax-free rebalancing will make up for it.
Sadly, to the best of our knowledge, the short answer is no. Currently, no mutual fund has a strict mandate to limit equity and debt allocations to around 50%. This is because of a stipulation by SEBI in their mutual fund categorization released in Oct 2017.
SEBI allows for the creation of balanced hybrid mutual funds. However, there are no mutual funds in this category at the time of writing! How did mutual fund houses leave out this category for asset gathering?
According to SEBI, balanced hybrid funds can have 40% to 60% of equity & equity related instruments and the rest in debt. These limits are quite reasonable to create a “balanced asset allocation fund”.
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However, SEBI also mandates that a fund house either have an aggressive hybrid fund (with 65-80% equity) or a balanced hybrid fund in its portfolio.
Since a balanced hybrid fund will be taxed as a “non-equity” fund (as per slab for gains accused up to three years and 20% with indexation for gains older than three years), AMCs prefer aggressive hybrid funds. In any case, older AMCs already had aggressive hybrid funds this making balanced hybrid funds unviable.
SEBI also states that no arbitrage would be permitted in balanced hybrid funds, possibly differentiating them from conservative hybrid funds (10% to 25% equity).
SEBI does allow arbitrage in aggressive hybrid funds. So in principle, an aggressive hybrid fund could hold 50% stocks, 15 arbitrage and 35% debt to create a 50:50 portfolio with favourable (equity-like) taxation. However, this would make them less aggressive during bull runs and, therefore, less desirable.
By definition, balanced advantage funds or dynamic asset allocation funds cannot have a range-bound equity allocation and will not fit the bill.
Multi-asset funds can pull this off with 50% equity, 40% debt and 10% gold but have flexible equity allocation limits. Many tend to hold more than 65% equity for favourable taxation.
Equity-savings funds can, in principle, fit the 50:50 requirement, but most of them do not hold much direct equity. They are essentially debt funds mixed with arbitrage for favourable taxation.
Fund of funds investing in debt and equity ETFs and some arbitrage can also be used to create a tax-efficient 50:50 fund. However, we could not find any. If you know of any fund with a reasonably restricted asset allocation of around 50% equity, do let us know.
Let us hope investors have a few options in the balanced hybrid category in future.
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