Hybrid Mutual Funds / Balanced Mutual Funds / Monthly Income Plans can help to balance debt and equity in your portfolio

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HYBRID funds typically comprise those funds which invest in a combination of debt and equity assets.

Some well known fund types in this category are balanced funds, MIPs (monthly income plans) and asset allocation funds.

Fundamentally, these fund types are quite similar. The difference is in the proportion of debt and equity investments. Some could be equity-oriented like balanced funds (typically 60 per cent or higher equity component) or aggressive MIPs (which typically have an equity component of 25 per cent or more) or some could be debt oriented.

MIP, as an asset class, have been quite popular with the retail investors, especially because, as the name suggests, many MIPs have monthly dividend payout option.

Balanced funds typically try to capture large part of the gains when equity markets are bullish and try to protect the downfall when equity prices are falling since they have 30-35per cent allocation in debt and money market instruments. Although, the name suggests that equity and debt ratio should be 50:50, equity allocation is kept at 65 per cent or higher in order to avail the favourable long-term capital gains tax which is at zero for equity oriented funds.

In terms of taxation, there is a difference between MIPs and balanced funds. The former is taxed as a debt fund and the latter as an equity fund. Hence, while in a balanced fund the long-term capital gains tax is zero, in an MIP it is 10 per cent without indexation and 20 per cent with indexation (not including surcharges). There is a difference even in terms of the short-term capital gains tax, which for balanced funds is 15 per cent and for MIPs as per the income tax slab applicable for the investor. As far as dividend option is concerned, in balanced funds the dividend distribution tax is zero, whereas, in MIPs it is at present around 14 per cent.

Asset allocation funds, on the other hand, could have somewhat different features, and allow the fund manager of the scheme to switch from debt to equity or vice versa depending on his/her view on asset classes giving superior returns.

Therefore, the performance of this fund would depend on the fund manager's ability to correctly anticipate turns in both the markets.

One may ask why hybrid funds, and why not invest in a pure equity or debt product. The biggest advantage which often is not thought of by investors is that investing in hybrid funds can help avoid the hassles of investing separately in either debt or equity. Prudent financial planning says that investors should ideally allocate their funds as per their risk appetite, return expectations and liquidity requirements.

Thus, both debt and equity funds should form part of the portfolio.

Once an investor has decided on what proportion he should divide his investments in equity, debt and other asset classes like gold and real estate, he can invest in a well managed hybrid fund which invests in a similar proportion. Incremental investments can also be made instead of being broken down every time into two different funds.

In most hybrid funds, typically, the debt portion would be managed by a debt fund manager and equity by an equity fund manager, both experienced professionals in their fields.

However, these funds do not fulfil liquidity requirements as they have exit loads and an investor needs to stay invested for a year or more. These funds also have high MTM (mark-to market) exposure, implying that, they are prone to price risk, credit risk and interest rate risk. Hence, capital protection is also ruled out.

 

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2. ICICI Prudential Tax Plan
3. DSP BlackRock Tax Saver Fund
4. Birla Sun Life Tax Relief '96
5. Reliance Tax Saver (ELSS) Fund
6. IDFC Tax Advantage (ELSS) Fund
7. SBI Magnum Tax Gain Scheme 1993
8. Sundaram Tax Saver

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