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Hybrid Funds Vs Diversified Equity Funds

In last 6 months: Dec 07 – May 08

Summary

  • Balanced Funds have been able to match the returns of diversified equity fund in the bullish market scenario due to the mandate of investing more than 65% of its net assets in equity funds
  • During the market downturn, balanced funds try to protect the returns by investing in debt securities up to 35% of total net assets
  • Monthly Income Plans (MIPs) is a solution for investors with capital consumption as an investment objective

Types of Hybrid Funds

  1. Balanced Funds
    • Balanced Funds cater to the investor class with moderate risk appetite by creating a mix of 2 asset classes i.e. Equity and Debt.
    • In order to get the taxation benefits of an equity oriented fund, balanced funds invest at least 65% of its net assets in equity asset class
  2. Monthly Income Plans (MIPs)
    • MIPs are most suitable for the investor class with low to moderate risk appetite and need for regular income at regular intervals
    • This is again a mix of 2 asset classes – Equity and Debt with reduced exposure to equities (approx 10% - 15%). Debt participation enables capital preservation and capital consumption objective and equity participation enables growth in the portfolio

Taxation Implications

 

Balanced Funds

Monthly Income Plans

Short Term Capital Gain Tax

*15.45%

As per income tax slabs

Long Term Capital Gain Tax

Nil

Less of 10% without indexation or 20% with indexation

Dividend Distribution Tax

Nil

**14.163%

* Short Term Capital Gain Tax is inclusive of education cess.

**Dividend distribution tax is inclusive of surcharge and education cess.

  • Along with protection of returns during the market fall, balanced funds also deliver high returns during the bullish market. An investor enjoys the tax benefits similar to that of investing in an equity fund.

Hybrid Funds Vs Equity Diversified Funds

* Performance as on January 21st 2009
  • Diversified equity funds have seen the maximum fall of approx. (-9.33%) in last 3 months
  • Followed by diversified equity funds, balanced funds too have not shown any resistance to falling market levels
  • Monthly income plans, on the contrary have managed to protect the returns because of less exposure to equities

* Data as on January 21st 2009

Rs 10,000 were invested on 1st January 2008 Value as on 20th January 2009

 

Amount invested

Current Value

Absolute Gain

BSE Sensex

10,000

4.483

-55.17%

DSPML Balanced Fund

10,000

6,012

-39.88%

FT Balanced Fund

10,000

5,965

-40.35%
  • Balanced funds have delivered better returns in last 1 year when compared with equities
  • The returns in balanced funds are mainly protected by the debt exposure up to 35% of total net assets

iTrust Recommendations

  • Balanced Funds should always form part of any investor's portfolio so as to protect the portfolio from market downside and deliver tax efficient returns during the rising market
  • Hybrid Funds are suitable for investors with low to medium risk appetite and long term horizon
    • Balanced Funds for investors seeking growth of capital with some protection during the market downturn
    • MIPs for investors whose investment objective is beating inflation and regular income at regular intervals

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