Last Updated on November 20, 2023 at 7:56 am
A balanced hybrid fund is an open-ended fund that invests in equity (40-60%) and debt (40-60%) instruments. No Arbitrage would be permitted in this scheme. A reader wants to know if we can invest in balanced hybrid funds and, if yes, when.
If you are wondering why you have not heard of this type of hybrid fund, then there is a good reason for it. The SEBI MF categorization rules have a clause: “Mutual Funds will be permitted to offer either an Aggressive Hybrid fund or Balanced fund”.
Since most established AMCs already had an aggressive hybrid fund, they could not offer the balanced hybrid variant. When budget 2023 modified the debt fund taxation rules and deemed all funds holding 35% or lower equity to be taxed as per slab, AMCs could not modify their existing funds to hold more equity because of the above clause.
Until recently, as we have previously pointed out, this category had no schemes! It was left to newbie AMCs with not many funds in their portfolio to offer such a product, and we now have two new balanced hybrid funds:
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- 360 ONE Balanced Hybrid Fund launched in Sep 2023
- WhiteOak Capital Balanced Hybrid Fund launched in Oct 2023
Any capital gains from units older than three years will be taxed at 20% with indexation. Gains from younger units will be taxed as per slab.
Assuming these funds typically hold 50% equity and 50 debt or thereabouts, does it make sense to invest in them?
Suppose an investor wants to invest in a balanced hybrid fund as a one-fund portfolio for medium-term or long term goals so they don’t have to worry about rebalancing. In that case, we are not enthusiastic and will not recommend it.
Yes, a 50% equity + 50% debt portfolio is an excellent choice for long-term goals, as we have shown earlier – Will Benjamin Graham’s 50% Stocks and 50% Bonds strategy work for India?
However, that does not mean I will depend on a single fund for this! Reason: Concentration risk, fund manager risk and lack of control risk, if we can coin a new phrase.
We need to control the asset allocation in our portfolio at all times, which means rebalancing and de-risking (systematic equity reduction) without worrying about tax. So, never a one-fund portfolio.
Can a balanced hybrid fund be used for a long-term goal (> 10 years) as part of a portfolio for someone who does want too much equity exposure? Yes, possibly, but the fund should be considered “equity” and supported with ample debt.
But then again, why bother when one can control risk with a lower exposure to an index fund? The adage, just because you can does not mean you should, applies nicely here!
Can a balanced hybrid fund be used for an intermediate-term goal (5-10 years)? No! It would be too risky (too much equity).
In summary, we see no compelling reason to invest in balanced hybrid funds.
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