How new Sebi rule will impact balanced mutual finds; see what is finally coming through

Published: January 15, 2018 4:54:14 AM

The problem doesn’t stop here. It gets bigger, as investors are putting their life savings in these funds with a hope to get regular dividends. Investors are supposed to know that a fund can only pay good dividends till the markets are in a good mood.

Taxation in mutual funds play a vital role. Both equity and debt funds are taxed differently.

Taxation in mutual funds play a vital role. Both equity and debt funds are taxed differently. While there is no long-term capital gain tax on equity funds after one year, for short term too the segment is taxed by 15%. For debt mutual fund schemes there is 20% long-term capital gain tax and a maximum of 30% short term capital gain tax (resident individuals & HUF). Very strategically schemes are framed today to ensure that investors benefit from the taxation perspective. Balanced funds today are having an average exposure of 65% to equities. These funds are taxed like equity funds whereas promoted as “less-risky” funds. But, are the Indian balanced mutual funds really enough balanced? With around 65% investing in equity, these funds are essentially equity funds that expose your money to almost the same amount of risk that any normal equity fund does. Rather, balanced funds in India have spread their 65% of equity exposure in large/mid/small cap and even micro-cap space. While this gives the fund manager the liberty to choose stocks that could usher in more risk to your portfolio. The mid-cap to micro-cap range is too risky for a conservative investor who intends to balance out the risk in his portfolio.

The problem doesn’t stop here. It gets bigger, as investors are putting their life savings in these funds with a hope to get regular dividends. Investors are supposed to know that a fund can only pay good dividends till the markets are in a good mood. As soon as the index decides to withdraw its support and falls, these funds will not be in a position to give dividends. Therefore assuming balanced funds to be a regular source of dividends or an alternative to income funds is hazardous to the health of one’s investment portfolio. The most important concern here is the promotion of these funds will have its repercussions eventually. While the industry is now shining bright, these balanced funds will go pale as the market retracts. Moreover, the investors will have to suffer the loss of their hard-earned money.

This has been corrected by the regulator. According to the Sebi circular on ‘Categorisation and Rationalisation of Mutual Fund Schemes’, the current balanced fund will now be called ‘Aggressive Hybrid Fund’ which will invest 65-80% of funds in equity and equity related instruments and 20-35% in debt instruments. The Balanced Hybrid Fund will invest 40-60% of assets in equity and equity related instruments and 60-40% in debt instruments. Further, the mutual Fund will be permitted to offer either an Aggressive Hybrid Fund or Balanced Fund which will ultimately result in merger of many schemes in the balanced fund category. With categorisation, hopefully there would be no room for confusion. The new categories for balanced funds would provide clarity to investors and also to fund managers as to where to invest and how much to invest. The balance in the balance funds is finally coming through.

Jimmy Patel
The writer is MD & CEO, Quantum AMC

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