Shyamali Basu
Individuals often aim for a balanced approach to life. Some like to spend higher number of hours at work while some prefer more hours for leisure, and there are some who prefer an equal time for both work and leisure. Same analogy holds true in other facets of life; in maintaining a healthy life where a balance between healthy diet and physical activities is the key; playing sports where having a balanced team can end up as a winning combination; social life where spending time with both your family and friends is important; and of course investments; wherein depending upon ones circumstances like liquidity needs, time horizon, taxation, goals and risk appetite, an optimum balance between various asset classes like equity, debt and gold is very important.
To help individuals achieve a balanced approach to investing, there are various mutual fund schemes that invest across asset classes. These schemes are known as hybrid funds. Balanced, MIPs, Equity Savings and Dynamic Allocation are categorized as Hybrid funds. Some are Equity oriented that have a higher portion in equities while some are debt oriented that have a predominant portion in fixed income securities. However, the most common category is the balanced category.
As these funds invest in both, equity and debt, these schemes provide diversification benefits. It is a well known fact that different asset classes perform differently in different market cycles and tend to move in opposite directions, thus being present in both equity and debt helps achieve diversification and reducing the overall risk of the portfolio.
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Additionally, having a combined portfolio of equity and debt helps avoid the hassles of switching between equity and debt, which can be tax inefficient. Further, as these funds invest more than 65 percent in equities, dividends received and capital gains after 1 year are tax free. Another benefit of these funds is it auto rebalance its equity and debt portion as it follows constant rebalancing strategy. Whenever the equity and debt portion moves out of the desired allocation range, the portfolio is periodically rebalanced.
Over the past few years, we have seen huge inflows in the balanced category with AUM of the category growing multi-fold. With financial literacy levels in the country going up and investors becoming more aware about the benefits of these funds, we have seen huge shift from traditional investment avenues to balanced funds.
These funds typically invest more than 65 percent in equity instruments and balance in debt securities. The equity portion aims for long term capital growth and the debt portion provides stability. These funds are less risky than pure equity funds as there is some debt component (around 30-35 percent) that acts as a cushion when equity markets fall and provides stability to the overall portfolio.
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There are other categories which are not so popular; however they have their own benefits and limitations:
MIPs: these are categorised under debt oriented hybrid funds. These funds have a higher portion invested in debt securities and a small portion (up to 30 percent) in equities. These are relatively less risky as compared to balanced funds and aim to provide regular cash flows (monthly, quarterly, half yearly) to investors in the form of dividends. The dividends declared are subject to dividend distribution tax and dividends received are tax free in the hands of the investors. Investors that require regular cash flows can also avail Systematic Withdrawal Plan (SWP).
Equity savings fund: This is relatively a new category. The category has started gaining momentum with AUM nearing INR 9000cr (Source: MFI). These schemes are positioned as conservative equity funds that have a net equity exposure in the range of 15-40 percent and balance in debt and arbitrage. The debt and arbitrage portion aims to provide steady income while the equity component provides for long term capital growth. The funds are structured in such a way that it qualifies for equity taxation, thus providing tax efficient returns to investors.
Dynamic allocation funds: They aim to change their allocation to equity and debt dynamically based on market valuations like PE, PB, etc. However, these funds haven’t seen much traction.
Apart from the above, there are other funds that invest in all three asset classes’ viz. equity, debt and gold.
With mutual funds providing wide range of schemes under hybrid funds from aggressive to conservative; serving the first time investor to a retiree, we can surely say that 'MUTUAL FUNDS Sahi hai'.
Author is Senior Vice President & Head - Products & Marketing, HDFC Asset Management Co. Ltd
Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol are their own and not that of the website or its management. Moneycontrol advises users to check with certified experts before taking any investment decisions.
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