Look beyond balanced funds to truly balance your portfolio

Arnav PandyaMutual fund investors in the country would have realised by now that they must not put too much faith in to just the name of the fund that they are investing into. This might not reflect the real situation that they would face in terms of the exposure on the ground and hence the risk reward ratio could change dramatically as compared to what they might be expecting. This is especially true for the category of balanced funds and for investors who are looking for an exposure to a balanced portfolio there is a different kind of approach that they would need to adopt. Here is a look at the steps that the investor would need to take in such a situation.Balanced investmentThere are times when the requirements or the needs for an individual investor are such that they should have an exposure to a balanced investment. This would typically mean that around half of the exposure should be in debt and the remaining half should be in equities. A slight variation in the percentage would be fine as the exposure needed has to be around this middle ground. There are two ways in which this can actually be implemented. The first one is to actually ensure that there are separate debt and equity oriented funds chosen for the required amount of exposure while the other one is to ensure that the individual chooses a balanced fund where one investment will take care of the entire situation. It is the second position that can lead to an element of problem for the individual as they might not get the exposure that they had wanted.Tax benefitsThe balanced funds that are present in India are not actually balanced in the true sense of the term because the equity component in these funds is around 70 per cent and in many cases the figure goes even higher. This fact by itself means that the desired exposure for the individual is not going to be available. This happens as the mutual fund goes in search of tax benefits for itself as well as for its investors. So in this situation the investor actually benefits on the tax front because the fund is classified as an equity oriented fund for the purpose of taxation and hence they do not have to pay any dividend distribution tax as well as they can take the benefit of the concessional rate of 15 per cent for short term capital gains and zero per cent for long term capital gains. Since this benefit is available only for those funds that maintain an average 65 per cent of its portfolio in equity shares of domestic companies there is not going to be a change in the portfolio composition of the balanced funds unless the overall tax benefit conditions change. The problem here is that the tax benefit pushes the nature of the exposure to the side.Search for alternativesThis does not mean that the individual has to abandon the search for a real balanced fund because there are such alternatives that are available in the market and the individual can choose one such option. The hybrid funds that are slightly less aggressive and which have an exposure of around 35-40 per cent to equities can be chosen by the individual for the exposure to balanced funds. There are such funds present and here the risk reward ratio would be different because the presence of the equity component in the portfolio is lower than what is normally seen with a balanced fund. There are also funds wherein the component of equity is even lower but these would not be what the investor had in mind when they were looking for a balanced fund so these could be dropped for this kind of exposure. On an overall basis the search for alternatives can yield the desired results and relying on the name balanced fund might not be the best alternative.