Investors were used to seeing balanced funds on the shelves of distributors and their investment advisors. These funds used to invest at least 65-70% in equities and the rest in debt instruments. The name was misleading though; balanced funds were never really “balanced” due to their equity tilt. But the category was popular. At the end of May 2018, its size was 24% of all pure equity funds, up from 10% just two years ago.
Sebi had taken note of the misleading name. In recent years, it gave approvals to new balanced funds only if they endeavoured to hold equities and debt in almost equal proportions. In October 2017, Sebi issued a list of 36 categories and told all funds to reposition their schemes into these. It also took this opportunity to streamline balanced funds and all other hybrid funds.
Get what you buy
Sebi carved out two categories.
A Balanced Hybrid Fund can hold equities up to 40-60% of the total assets and the rest in debt. It would have to let go of its equity tax status. An Aggressive Hybrid Fund (which was earlier the balanced fund prevalent in the industry) can have 65-80% of assets in equities and 20-35% in debt. Most of the earlier balanced funds chose to, therefore, become Aggressive Hybrid Fund and had to sacrifice the name Balanced.
A new category of hybrid fund was born out of this re-classification exercise called Dynamic Asset Allocation or Balanced Advantage fund. Here, a fund manager can swing wildly between equities and debt. If she feels equities are on their way down, she has a choice to switch completely to debt. But if she feels that equity markets have bottomed out and can now only go up, she can hold as much in equities as she’d like.
Sebi has also given an official status to other types of hybrid funds. Long-time MF investors would recollect schemes like monthly income plans. These invested 10-25% in equities and the rest in debt and aimed to give you a regular—preferably monthly or quarterly—income through dividends. Again, this was a misnomer as fund houses are barred from assuring dividends. These schemes shall now be called Conservative Hybrid Fund. They can invest 10-25% in equities and the rest in debt.
What you should do
Over the years, the need for mutual fund schemes to be more true-to-label have been felt at several levels.
By re-classifying scheme categories, Sebi has attempted to ensure that you get what you buy.
It’s always wise to avoid falling into traps like regular or monthly dividends that some of the erstwhile balanced funds offered.