Sebi frowns on new balanced fund launches

With regulator insisting on 50-50 asset mix for fresh entrants, only one fund has received approval since Jan 2012

The Securities and Exchange Board of India (Sebi) has been going slow on giving approvals to balanced funds, with only one getting the regulator’s nod in three years.

Since January 2012, at least seven fund houses have filed offer documents for launching these but are yet to get a nod.

“Sebi is insisting on funds that offer a 50-50 mix but asset management companies are not keen, as these do not offer a tax advantage,” said the chief executive officer of a fund house, on condition of anonymity. “Since most diversified equity funds offer a 70-100 per cent equity exposure, the regulator believes a balanced fund offering 65-75 per cent does not offer much differentiation.”

Most existing balanced funds invest a minimum of 65 per cent in equities, to qualify as equity funds. The advantage of being so classified is that capital gains become tax-free after a year and there is no dividend distribution tax.

JPMorgan's balanced fund, which recently got the regulator's nod, aims to invest 30-60 per cent in equities and 30-60 per cent in fixed income. And, “taxation was a bit of a challenge but we found a way out by investing five to 10 per cent in equity arbitrage opportunities. This allowed us to offer a good asset allocation option to investors and also meet the regulatory requirements,” said Nandkumar Surti, chief executive officer, JPMorgan AMC.

Interestingly, the fund house had filed for a JPMorgan India Balanced Fund in May 2013, which aimed to invest 65-75 per cent in equities and 25-35 per cent in debt instruments. The scheme was not approved.

According to sector observers, Sebi's decision not to allow balanced funds with a 65-plus per cent allocation to equities will create an unequal playing field, since new funds will not be able to beat the returns of existing ones. “Balanced funds today are quite equity-tilted. If the regulator is serious about implementing the new norms, even existing funds should be asked to change their nomenclature and not call themselves balanced funds,” said Dhirendra Kumar, CEO, Value Research, a mutual fund tracker.

Notably, all balanced funds had started off with a 50:50 allocation but changed to 65:35, favouring equities, after the tax laws changed in 2006.

It is not clear whether Sebi will come out with new norms to approve balanced funds or ask existing funds to change their asset mix or reclassify themselves. An email to Sebi did not elicit a response.

Balanced funds have come into the limelight of late because of their superior performance to large-cap funds. The funds have given one-year average category returns of about 31 per cent, higher than the 27 per cent locked by large-cap equity funds, shows the data. The performance has been superior even for three-year and five-year periods.

To be sure, several new hybrid funds with an equity tilt were launched in the recent past. In 2014, four fund houses hit the market with funds that invest about 65 per cent in equity and the rest in debt instruments. However, these are not classified as balanced funds and are more defensive in nature, as over 25 per cent of the equity holding is deployed for equity arbitrage.