Should you invest in the latest, true-to-label balanced hybrid mutual funds?
Theoretically, balanced mutual funds have only one mandate: to maintain ‘balance’ between equity and debt. However, this is not the way that the existing balanced funds in India have been managed over the years. Most funds in this segment maintain a tilt towards equities to qualify for the preferential equity taxation. This bias takes the balance out of the balanced funds. This seems to be the pitch of newer, pure-play balanced hybrid funds. Two recent offerings—WhiteOak Capital Balanced Hybrid and 360 ONE Balanced Hybrid—are positioned to offer a true-to-label balanced strategy. Both will strive to rebalance the equity-debt mix to 50:50 whenever the asset allocation limits are breached on either side due to market movement. Should you care about this at all? The answer may vary depending on how you respond to risks in your portfolio. Equity investments can potentially be very rewarding in the long term, but tend to exhibit intermittent volatility.Debt investments, on the other hand, provide stability, but offer lower returns than equities in the long run. If you opt for a skew in either asset class, you are giving up on something: high returns or stability. If you are overcommitted to equities, you may experience stress if the market nosedives. On the flipside, you may feel regret if the market goes on a multi-year run while you remain underexposed to equities. It is when investors are exposed to market extremes that emotions are triggered and mistakes happen. According to a study by WhiteOak Capital AMC, the 50:50 equity-debt mix is the optimal combination for healthy returns at subdued risk. When equity exposure is less than 50%, the portfolio exhibits lower volatility and offers high risk-adjusted return, but gives poor overall return.
50:50 asset mix offers a balanced risk-reward payoff
Being exposed to either market extreme may trigger investing mistakes.
Note:^Average 1-year rolling return on daily basis and standard deviation (volatility) of the return for various combinations of equity and debt, for January 2001 to June 2023, is considered for the analysis. Source: WhiteOak Capital AMC.
Taking equity exposure incrementally beyond 50% adds considerably to the portfolio return, but this comes at the cost of much higher volatility and results in lower risk-adjusted return. Investors can avoid both scenarios by maintaining a 50:50 allocation for reasonable return with limited volatility. The newer balanced hybrid funds are positioned at this mid-section of the risk-reward spectrum. Amol Joshi, Founder, PlanRupee Investment Services, asserts, “The 50:50 balanced hybrid fund, with rebalancing, helps reduce equity-induced volatility in the portfolio. Hence, it could be a starting vehicle for new mutual fund investors with moderate risk profiles.” These funds specifically distance themselves from the typical fare in balanced funds, which comes in the form of aggressive hybrid funds. These take around 70% exposure to equities to qualify for the superior tax treatment of 10% tax on capital gains after a year of holding. The so-called balanced advantage funds also have an equity tilt, albeit hedged with derivatives exposure.
Some reckon that the obsession with tax efficiency takes away from the basic premise of balanced funds. Ideally, risk exposure should not be guided by tax consideration. Aashish Somaiyaa, CEO, WhiteOak Capital Asset Management, says, “Balanced funds were supposed to be just ‘balanced’, but because of tax consideration, they took 65-80% exposure in equity, going off-balance, and even had to be renamed aggressive hybrid funds. Taxation should never be your prime consideration in determining the risk you should take to drive returns.” Having an even allocation to equity and debt may not be the remedy for all as risk appetites vary. If you are comfortable with increasing portfolio volatility for higher returns, there is no reason why you should limit your equity exposure. Vidya Bala, Co-founder, Primeinvestor.in, suggests that there is no sanctity in deeming a 50:50 asset mix as truly balanced. “For my risk profile, even 60:40 mix can be balanced,” she says. Besides, she believes that the existing balanced advantage funds have contained declines well over two-three year time periods. For shorter periods, equity savings funds have also done a good job. “If balanced advantage and equity savings funds give superior tax options than this category with equal downside, there will be little case for balanced hybrid category,” Bala adds.
The new balanced hybrid funds actually offer a degree of tax efficiency as well. Unlike the unfavourable new tax regime for pure debt funds, these funds are eligible for indexation benefit on capital gains. So, any gains realised after three years get taxed at 20% after adjusting the principal for inflation. The indexation benefit can even make for superior tax efficiency over equity-oriented funds, depending on the rate of inflation during the holding period. Short-term capital gains on a holding period of less than three years will be taxed at slab rate. However, tax treatment alone should not influence the choice of investment. “The indexation benefit available to this category is possibly the primary motive to introduce new schemes now,” Bala argues. While balanced hybrid funds are filling a void, there is no track record to prove the superiority of 50:50 asset mix. Joshi insists that categories like balanced advantage too offer something that investors like: rule-based profit booking. Investors should simply choose strategies that suit their risk appetites.
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This story originally appeared on: India Times - Author:Faqs of Insurances
