Balanced Hybrid Mutual Funds: Meaning, Types, Benefits, Return and Taxation

Do you want to invest in a scheme that provides stable returns as well as capital appreciation? Then Hybrid funds can be a suitable option for you. These mutual funds invest in both equities and debt market securities in specified proportions. However, if you want an equal balance of equities and debt in your portfolio, you could invest in balanced hybrid mutual funds. These schemes invest in equal proportions in equity and debt instruments to generate moderate growth. 

What Are Balanced Hybrid Mutual Funds? 

According to the Securities Exchange Board of India (SEBI), a balanced hybrid fund is an open-ended balanced scheme which invests in equity and debt instruments. As per SEBI’s mandate, the percentage of equity and equity-related instruments has to be between 40% and 60% of the total assets with the balance being invested in debt instruments. Furthermore, please note that SEBI does not permit any arbitrage on balanced hybrid funds.

How Does a Balanced Hybrid Fund Work? 

The equity-linked instruments of a balanced fund help facilitate capital appreciation, while the assets allocated to debt aim to stabilise the returns. Together the debt and equity instruments create a balance between ‘safety against potential risks’ and ‘optimising the returns.’ This enables the investor to take full advantage of portfolio diversification without investing in different asset classes separately. 

What Are the Different Types of Balanced Hybrid Funds? 

Most balanced hybrid funds can be categorised into two types based on their equity and debt component.

• Equity-oriented balanced funds: In this, balanced hybrid funds allocate primarily to equity and equity-related investments.
• Debt-oriented balanced funds: These hybrid funds invest primarily in fixed-income securities such as bonds, government securities, treasury bills, etc.

Benefits of Investing in Balanced Funds 

Listed below are the advantages of balanced hybrid mutual funds: 

• These mutual funds have optimised exposure to debt and equity components, thus offering diversification benefits to investors. The fund’s equity portion generates capital appreciation, while the debt instruments act as securities and protect the fund from unforeseen movements in the market. 
• Hybrid or balanced funds are an ideal gateway for new investors to begin their equity investments. They have the opportunity to earn profits at a moderate level of risk. 
• Balanced funds help investors receive optimal returns within a short or mid-tenure without worrying too much about market volatility. 

Returns of Balanced Funds 

In the long run, balanced hybrid mutual funds tend to generate better risk-adjusted returns compared to the returns of other hybrid funds. Mentioned below are details:

• On average, these mutual fund schemes have generated returns of 6.59% per annum in the previous year. 
• Their average annualised return for 3-years is 13.34% per annum. 
• The 5-year average annualised return for these funds is 9.1% per annum. 

Please note that these returns are not guaranteed. 

Who Should Invest in Balanced Hybrid Funds?

Every individual has different financial goals while investing. So, before we explore who all are suitable to invest in a balanced fund, let us look at the following essential points:

• The objective of the mutual fund scheme should align with your financial goals. 
• Analyse the risk associated with the fund and match it with your risk profile.
• While there is generally no lock-in period for balanced hybrid funds, you should consider the exit-load fees in case of early redemption.
• Further, hybrid mutual funds generally yield optimal returns in a medium to long-term tenure (4 – 10 years).

With these pointers in mind, let us understand for whom these funds are best suited:

• If someone wishes to generate a stream of income and create wealth that would outpace inflation, these mutual funds have the potential to offer them a steady income. The dividends received from equities and periodic payments from debt instruments help them deliver stable returns. 
• People who have in mind long-term financial goals like retirement corpus or medium-term goals like modest capital accumulation with a revenue source can consider investing in balanced funds. 
• Investors with a low-risk appetite who want decent returns can invest in these funds. This is because balanced funds offer growth potential while moderating the portfolio volatility. 

Tax Implications of Balanced Funds 

Details of taxations of a balanced hybrid mutual fund are given in the following points: 

• The taxation of balanced hybrid mutual funds depends on the equity and debt allocation of the fund. 
• If the balanced hybrid fund holds 65% or more in equities or equity-related instruments, it is treated as a pure equity scheme for taxation purposes.
• If the holding period of the investment is less than 12 months, then short-term capital gains (STCG) tax is levied at 15%. 
• However, if the holding period exceeds 12 months, long-term capital gains (LTCG) from the equity-oriented fund are taxable at a 10% rate. However, please note that these tax rates would be applicable after an exemption of Rs. 1 lakh applies to the investor’s equity gains. 
• When it comes to debt-oriented mutual funds, the tax rules are as follows:
  • LTCG tax is levied if the holding period of the investments exceeds three years, the applicable tax rate is 20% with indexation benefits.
  • Additionally, if the holding period of investments in debt-oriented mutual funds is less than three years, the gains are considered to be STCG. The applicable tax rates depend on the investor’s income tax slab rate. 

Things to Remember before Investing in Balanced Funds

Listed below are important factors that investors must consider before investing in balanced hybrid mutual funds:

• Associated Risk:

Every investment carries some inherent risk. As Mutual Funds are subject to market volatility, even balanced funds are not entirely safe. While they are relatively safer than equity funds, they are riskier than debt funds. Therefore, people must assess their risk profile before making investments. 

• Investment horizon

After analysing past performances of balanced hybrid funds, investors should assess how long they need to stay invested to reach their financial goals. Finance experts generally suggest an investment horizon of three years or more for balanced funds. So, if you are looking for investment options with short tenure, balanced funds may not be the right choice. 

• Expense ratio 

The annual fee an investor has to pay the AMC (Asset Management Company) for managing his assets is referred to as the expense ratio. Investors should consider the expense ratio of the balanced hybrid fund before investing. This is because a high expense ratio reduces NAV (net asset value), further reducing payout during redemption. 

Final Word

This blog has provided crucial details about balanced hybrid mutual funds. These open-ended schemes invest in equity and debt instruments in almost equal proportions, thus offering stable returns and moderate risk levels. However, like any investment scheme, they also have certain drawbacks that investors shouldn’t overlook. 

FAQs about Balanced Hybrid Mutual Funds