However, there are certain benefits of allocation through a balanced fund as well. The category, which was called balanced Funds prior to Sebi’s fund categorization rules announced in October 2017, is now called aggressive hybrid fund. This category is defined by equity allocation in the range of 65 per cent to 80 per cent of the portfolio. The advantages of doing it through Aggressive Hybrid Funds are as follows:
Discipline: Allocation to equity and debt is done at a ratio decided as per the investment objectives. For discussion purposes, let us say the decided ratio is 70:30 to equity: debt. Since market movement is not uniform, this ratio gets distorted. It may so happen that there is a rally in the equity market whereas debt is giving accrual-based returns. As a result, the initially constructed ratio of 70:30 becomes say 85:15. While some change in the ratio will happen every day, any significant change calls for review and rebalancing. Otherwise, the portfolio may be dichotomous with the investment objectives. In the defined funds, due to practical reasons, your rebalancing may take a backseat. In an aggressive hybrid fund, since there is a parameter to be followed, there is a discipline and the fund manager does the rebalancing periodically.
Flexibility: In the defined categories, apart from flexi cap funds, there is a binding on the fund manager on the selection of stocks. In largecap funds, it is limited to top 100 stocks, in the multicap category, it is 25 per cent to each of largecap, midcap and smallcap categories, etc. In debt funds, there are parameters on portfolio maturity, credit rating of instruments, etc. In hybrid funds, there is more flexibility to the fund manager.
Taxation: Taxation is more efficient in equity funds as it becomes long term after a holding period of one year against three years for debt funds. Moreover, long-term capital gains up to Rs 1 lakh is exempt for equity funds. In an allocation of say 70:30 to equity and debt in the usual funds, while 70 per cent gets taxed as equity, 30 per cent is taxed as debt. In aggressive hybrid funds, since it is by definition an equity fund for taxation purposes, the entire quantum is taxed as equity. If you are doing it through defined funds, there may be a tax implication on your rebalancing.
In this context, the allocation done by the market gives a perspective to what the broad market is preferring. As of June 2021, the AUM in the hybrid funds category comprising six varieties, was Rs 3.89 lakh crore. Out of this, allocation to aggressive hybrid funds was Rs 1.31 lakh crore, followed by balanced advantage funds at Rs 1.19 lakh crore, arbitrage funds at Rs 96,000 crore and multi asset allocation Funds at Rs 16,000 crore. This shows that as per the broad investor/distribution community, aggressive hybrid funds are the most popular category among hybrid funds.
Coming to performance of funds in this category, over a period of 10 years till August 2, 2021, 11 funds in this category with a history of 10 years have delivered 13.22 per cent annualized on an average. For benchmarking purposes, over the same period, CRISIL Hybrid 35+65 Aggressive Total Return Index has delivered 12.22 per cent annualized. To mention two more benchmarks, CRISIL Hybrid 25+75 Aggressive Index shows 12.63 per cent over the period and Nifty50 Hybrid Composite Debt 65:35 Index has a number of 11.69 per cent.
While the composition of the funds and the benchmarks and the comparability may be debated, broadly, the category has performed well. Over this period of 10 years, ICICI Prudential Equity & Debt Fund has delivered 15.13 per cent annualised, SBI Equity Hybrid Fund 14.73 per cent and HDFC Hybrid Equity Fund 14.19 per cent. On a five-year performance parameter, till August 2, 2021, the average annualized return from 12 funds with a history of 5 years is 11.97 per cent. over this period, ICICI Prudential Equity & Debt Fund has delivered 14.38 per cent, Mirae Asset Hybrid Equity Fund 14.27 per cent and DSP Equity & Bond Fund 13.86 per cent. Nearer term, over 1 year, the category has performed even better and beaten the indices handsomely. The average of 15 funds is 43.5 per cent against 30 per cent to 38 per cent of the three indices mentioned earlier. ICICI Prudential Equity & Debt Fund has returned 56.8 per cent over one year, Kotak Equity Hybrid Fund 52 per cent and IDFC Hybrid Equity Fund 50.4 per cent.
Conclusion: When you invest through the parameter-defined funds, you have a better control over the boundaries of investments to be followed by the fund manager e.g. largecap stocks or smallcap stocks or the portfolio maturity of debt funds. In aggressive hybrid funds, the fund manager has more flexibility and you are sure of the allocation discipline and can buy it for the keeps over a long horizon.
