“Until recently, an AMC could offer either a balanced hybrid fund or an aggressive hybrid fund, but not both. Most fund houses opted for the latter. Under Sebi’s revised framework, AMCs can now offer both categories, subject to prescribed limits on portfolio overlap. This has prompted several fund houses to launch balanced hybrid schemes for the first time,” says Ranjit Bhatia, head of investment risk and product strategy at WhiteOak Capital.
A balanced hybrid fund must invest 40–60 per cent of its portfolio in equity and 40–60 per cent in debt. It cannot allocate to arbitrage. Thus, these funds invest less in equities than aggressive hybrid funds, which are allowed to take 65–80 per cent exposure.
Benefits and drawbacks
On the positive side, balanced hybrid funds offer a disciplined 40–60 per cent equity allocation, while debt provides a cushion against market volatility. The fund manager handles rebalancing, so investors get diversification and a balanced equity-debt mix without having to manage asset allocation themselves.
On the negative side, since equity exposure can fall below 65 per cent, these funds do not qualify for equity taxation.
The category has a limited track record. “Returns may be lower than aggressive hybrid or pure equity funds because of the 60 per cent equity cap,” says Bhatia.
“Balanced hybrid funds can underperform aggressive hybrids in certain market conditions, particularly when rising interest rates hurt both equity and debt markets,” adds Souvik Biswas, head of research, Bajaj Capital.
Bhatia points out that these funds carry equity-market and interest-rate risks and should not be regarded as capital-protection products.
Checks before you invest
Review the debt portfolio’s credit quality, duration and interest-rate sensitivity. Assess rebalancing practices across schemes. Also compare expense ratios, as costs can affect returns.
“Since the category has a limited track record, assess the fund manager’s experience across equity and debt market cycles rather than relying only on past returns,” says Bhatia.
Balanced hybrid funds suit investors with a moderate risk appetite who want meaningful equity participation without taking on the full volatility of a pure equity fund.
“Their key distinction is discipline: Unlike aggressive hybrid funds, which can behave more like equity during market falls, or balanced advantage funds, where the manager can dynamically change equity exposure, balanced hybrid funds must stay within a 40–60 per cent equity band,” says Manish Jain, deputy chief executive officer (CEO), Choice Mutual Fund (Choice AMC).
This makes them suitable for investors who seek a predictable, rule-based mix, particularly first-time investors who want to ease into equity and those nearing retirement. “They can be considered by investors around seven years from retirement who want to gradually reduce equity risk while retaining some growth potential,” says Biswas.
These funds may not suit high-risk investors who seek higher equity-driven returns. Aggressive hybrid or equity-oriented funds may be more appropriate for such investors.
“They may also be less suitable for investors looking for short-term investments or tactical asset allocation, given the 24-month holding period for long-term capital gains (LTCG) and the fund’s fixed 40–60 per cent equity range,” says Biswas.
Investors should ideally stay invested for a minimum of three years, though five years or more is ideal. “Investing for less than three years may expose investors to market volatility without giving the equity portion enough time to recover and compound,” says Bhatia.
How these funds are taxed
• Holding period must be more than 24 months for gains to qualify as long-term capital gains (LTCG)
• LTCG is taxed at 12.5 per cent without indexation
• Holding period of 24 months or less qualifies as short-term capital gain (STCG)
• STCG is taxed at the applicable income-tax slab rate
• Gains do not qualify for the ₹1.25 lakh LTCG exemption associated with equity-oriented funds
• Income distributed under the IDCW (income distribution cum capital withdrawal) option is taxable in the investor’s hands at the applicable tax rate
The writer is a Delhi-based independent journalist