Are Balanced Funds really that Balanced?

Posted On Wednesday, Dec 20, 2017

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 in equity funds after one year, for short term too the segment is taxed by 15% whereas in 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. Ironic!

But, are the Indian balanced mutual funds really enough balanced? Are we showing the real picture to our investors? 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 to large/mid/small cap and even micro-cap space. While this gives the fund manager the liberty to choose stocks but that could welcome 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 it’s repercussions eventually. While the industry is now seeing light of the day, when these balanced funds show their true colours as the market retorts the picture could turn pale. Moreover the investors will have to suffer the loss of their hard earned money.

This has been thankfully corrected by the regulator! According to the SEBI circular Categorization and Rationalization of Mutual Fund Schemes the current balanced fund will now be called as Aggressive Hybrid Fund which will invest in Equity & Equity related instruments between 65% and 80% of total assets and Debt instruments between 20% 35% of total assets. The Balanced Hybrid Fund will invest in Equity & Equity related instruments between 40% and 60% of total assets and debt instruments between 40% and 60% of total assets (No arbitrage would be permitted in the scheme). 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 / in this category.

With categorization happening and rationale explained by the regulator himself, there would hopefully be no room for confusion. The new categories for balanced funds would provide clarity to investors and also fund managers as to where to invest and how much to invest. The balance in the balance funds is finally coming through.

Disclaimer, Statutory Details & Risk Factors:

The views expressed here in this article / video are for general information and reading purpose only and do not constitute any guidelines and recommendations on any course of action to be followed by the reader. Quantum AMC / Quantum Mutual Fund is not guaranteeing / offering / communicating any indicative yield on investments made in the scheme(s). The views are not meant to serve as a professional guide / investment advice / intended to be an offer or solicitation for the purchase or sale of any financial product or instrument or mutual fund units for the reader. The article has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Whilst no action has been solicited based upon the information provided herein, due care has been taken to ensure that the facts are accurate and views given are fair and reasonable as on date. Readers of this article should rely on information/data arising out of their own investigations and advised to seek independent professional advice and arrive at an informed decision before making any investments.

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Please visit – to read scheme specific risk factors. Investors in the Scheme(s) are not being offered a guaranteed or assured rate of return and there can be no assurance that the schemes objective will be achieved and the NAV of the scheme(s) may go up and down depending upon the factors and forces affecting securities market. Investment in mutual fund units involves investment risk such as trading volumes, settlement risk, liquidity risk, default risk including possible loss of capital. Past performance of the sponsor / AMC / Mutual Fund does not indicate the future performance of the Scheme(s). Statutory Details: Quantum Mutual Fund (the Fund) has been constituted as a Trust under the Indian Trusts Act, 1882. Sponsor: Quantum Advisors Private Limited. (liability of Sponsor limited to Rs. 1,00,000/-) Trustee: Quantum Trustee Company Private Limited. Investment Manager: Quantum Asset Management Company Private Limited. The Sponsor, Trustee and Investment Manager are incorporated under the Companies Act, 1956.

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