Regret investing in balanced funds? Adopt a suitable exit strategy

When shifting, try to minimise the tax burden arising from this step

Balanced funds, also known as equity-oriented hybrid funds, were investors’ favourite investment category in 2017. But they appear to be losing favour with investors, as is evident from the 31 per cent decline in their sales in February compared to the previous month. This decline has been triggered primarily by the imposition of 10 per cent dividend distribution tax (DDT) in the Budget, which will come into effect from April 1. The stock market downturn has also contributed. Existing investors need to re-examine their initial reasons for investing in these funds and then if need be, adopt a suitable exit strategy. 
 
First-time equity investors considering an investment in balanced funds may go ahead and do so. "If you have never tried equities before, balanced funds offer a good entry point. They are less volatile than pure equity funds, and they diversify your investments over many stocks. With just Rs 1,000-2000, a new investor can get the benefit of asset allocation to equities and debt in a single portfolio," says Vidya Bala, head of research, Fundsindia.com. The fund manager manages the asset allocation in these funds, so investors don't need to bother about periodic rebalancing.
 
Those who have already invested in balanced funds need to reassess their position. If you had bought the balanced fund for the above-mentioned reasons — the first-time investor with a small amount to invest and looking for asset allocation — stay put. 

Source: Amfi, Ace MF

But investors who were sold the dividend option of these funds as a source of tax-free income need to exit. "Dividend from any equity-oriented scheme is not fixed. It depends on fund performance and market conditions," says Kaustubh Belapurkar, director-manager research, Morningstar Investment Advisor India. Once the markets stop rising and these funds stop generating a surplus, they will stop paying a regular monthly dividend.  
 
Investors who don't need the dividend should consider shifting to the growth option of these funds. "Remember that the switch will be considered a fresh investment and could have tax implications," says Belapurkar. Those who switch before one year will have to pay 15 per cent tax on the short-term capital gain. "An investor should let his investment complete a year before switching," says Belapurkar. If you have completed one year and shift by March 31, there will be no long-term capital gains (LTCG). After March 31, there will be a 10 per cent tax on LTCG. Even after March 31, there is still a possibility that you may not need to pay LTCG tax as gains up to Rs 100,000 are tax-free. Even if you exceed this limit, the outgo may not be high due to the grandfathering clause: The investor can choose to calculate gains either from the date of investment or the value of the fund on January 31.
 
If you are, say, a retiree, who needs a regular monthly income, again you need to exit these products. If you have not completed one year, pay the 15 per cent tax payable on short-term capital gains (STCG) and exit (wait only if the one-year deadline is close). Invest the money in a liquid fund, ultra-short term debt fund, or short-term debt fund and do a systematic withdrawal plan (SWP).

An individual looking for higher returns and capable of stomaching higher volatility may consider monthly income plans, which invest 25-30 per cent in equities and the rest in debt.