How to pick Balance Scheme Funds after recategorization of Mutual Fund

The Security and Exchange Board of India's (Sebi's) recategorization of mutual fund rule has come into force. Now all balanced funds will known as Hybrid Funds. Through Hybrid Scheme, we can invest in both equity and debt assets (such as stocks & bonds), in different ratio.  This rule not only created the different category of Hybrid Funds but also standardized the allocation of these schemes. To the large extent, it will not change the fundamental qualities of the schemes. So now it becomes easier for the investor to choose the right one based on your goal and risk profile.

Before picking up the right Hybrid Fund for you, first look at what is balanced fund?

Balanced Fund which is also called Hybrid Funds is a mix of equity and debt mutual fund. They earn the title "Balanced" by keeping the balance between two asset classes. They keep their investment in the ratio of 60-40. Where 60% of the amount invested in stocks, and the balance 40% invested in debt schemes. Balanced funds are suitable for first-time investors. And these funds are for those investors who have a low-risk profile.

How to pick Balance Scheme Funds after recategorization of Mutual Fund?

There are three types of Hybrid Funds - Balanced Hybrid, Aggressive Hybrid & Taxation of Hybrid schemes. Among these schemes, you can choose the best one based on your risk appetite.

Balanced Hybrid (BH):

This is an open-ended Hybrid scheme category, where the investor invest in both equity and debt instruments. If you are looking for some considerable allocation to equities, you can select a fund from the Balanced Hybrid Category. The amount allocated for equity assets remains 40 - 60 percent of the total assets. And the allocation for debt assets also remains the same between 40 to 60 percent.

Aggressive Hybrid (AH):

It is an open-ended Hybrid scheme category predominantly invest in equity assets. If you want to invest predominantly in equity, Aggressive Hybrid is for you. In this category, the allocation for equity remains 65 - 80 percent of total assets. And the allocation for debt instruments remains between 20 - 35 percent.

Taxation of hybrid schemes:

The gains made from the equity funds are different from the non-equity funds or debt funds. To consider an equity fund, the equity allocation in the fund has anything above 65 percent of the total assets. Therefore, unlike in the past, when a scheme's portfolio had to refer to gauge its tax treatment, now the categories itself will decide it. Out of Balanced Hybrid and Aggressive Hybrid, the tax advantage on long-term capital gains will be there only with Aggressive Hybrid mutual funds schemes because of its larger equity portion.

So, the next time when you look to invest, then you know which category to consider. However, picking any scheme from within the Aggressive Hybrid category may not be sufficient. A look at the fund fact sheet to view its portfolio should not overlook. In reality, the actual allocation may differ.

For example, one Aggressive Hybrid may hold 66 percent in equities and balance in debt, while another Aggressive Hybrid may hold 79 percent in equities. Picking one scheme blindly from a category may not serve the purpose. With over 65% in equity, there is bound to be volatility, although marginally lower than that of equity funds. Therefore, SIPs as a route to markets work well in the context of balanced funds too. However, we would caution investors that the 1 percent dividend per month is a fallacy and should not be the reason to invest in balanced funds.