—Balaji
Some BAFs may use derivatives to take care of their equity exposure by hedging and this helps them maintain the overall allocation of equity in the fund’s portfolio above 65%. This in a way ensures these funds get classified as equity funds from a taxation perspective. Short term capital gains (that is, gain on units sold within one year) from equity funds are taxed at 15%. Long term capital gains from equity funds are taxed at 10% if the gain exceeds ₹1 lakh in a financial year.
Derivatives can also help generate risk-free returns through arbitrage opportunities where the funds use the price difference in Cash and F&O (futures and options) markets. Using derivatives is more a function of portfolio allocation and it also depends on the market conditions. BAFs however can shift from one asset class to another based on the market and this offers higher flexibility to the fund managers.
As per Sebi’s recategorization norms, BAFs (or dynamic asset allocation funds) can manage their equity / debt investments dynamically. Such funds typically raise their equity exposure when markets are looking attractive and vice versa. This makes it one of the best categories in hybrid funds to invest in.
Usually, investors with a horizon of 3 to 4 years or more who want to have limited allocation in equity from a risk perspective consider investing in BAFs. Some good funds within the BAF category today are ICICI Balanced Advantage Fund, Nippon India Balanced Advantage Fund, Kotak Balanced Advantage Fund and HDFC Balanced Advantage Fund.
Equity diversified mutual funds are ideal for the investment horizon above five years and these funds continue to have the potential to generate good inflation-adjusted returns in the long term in our view. Today, if we look at 5- years SIP return of top large cap funds, it is around 16-17% per annum and for the large and mid cap fund category, it is between 18–20%. Likewise, even if we check on the worst performing funds in the large cap fund category, their returns are around 11-13%, and in the large and mid cap fund category, it is 13-15% per annum for the last five years.
There is no doubt that all the funds did get the benefit of positive market movement in recent times which helped them recover at a faster rate. But this volatility works both on the positive and negative side and this is what helps the fund manager as well as the investor to have opportunities to generate returns. Hence, over the long term, that is, for a horizon of above 5 to 7 years, you can consider investing in equity diversified funds. A portfolio of consistently well- performing equity diversified funds should help you generate a much better rate inflation-adjusted return.
Harshad Chetanwala is co-founder at MyWealthGrowth.com.
