A few weeks back, investor Thiyagarajan Chandrasekaran posted on a popular financial portal ‘there is nofor the month of December-18 and February-19’. Thiyagarajan had put his hard-earned money in a top-rated balanced scheme of a and was surprised to know that monthly were not guaranteed.
He primarily opted for balanced funds (as against that of bank FDs) to improve his monthly inflows. However, little did he know that itswere subject to fund performance.
Bank FDs are considered safe by most investors. But they are also not tax-efficient since interest income is taxable at investor’s tax slab rate (30% on the higher side). While NAV performance.from are taxed at a lower rate of 10%, it is also subject to
To be frank, bank FDs and balanced funds have different risk-return profiles and are strictly not comparable. Balanced funds take riskier bets byinto equities and thus become a promising avenue to earn higher returns than that of bank FDs. Its incremental returns come from taking additional risks.
Most balanced funds that are currently available in the marketinto equities to avail tax benefits. As per SEBI rules, they are classified as ‘aggressive hybrid funds’ which anywhere between 65%-80% of its assets into equities and the balance 20%-35% into debt instruments.
from these equity-oriented schemes are taxed at a lower rate of 10% as against 20% for debt-based schemes. However, in the process, their NAV also vacillates with the stock market movements without providing the stability of a debt oriented product.
Also, unlike other categories of(say large cap ), where the basket is clearly delineated, for balanced funds, options can be wide open. Some balanced funds in the past have taken higher risk than their peers by more in mid cap and small cap companies. Others, have taken duration calls on their debt portfolio to benefit from the interest rate movements in the economy.
Last but not the least, investing in balanced funds can unknowingly tweak your asset allocation strategies. With asset allocation of balanced funds remaining dynamic, it’s likely you might be overinvested or underinvested into equities than you thought otherwise.
While one could argue about the lower tax status of balanced funds (as against that of debt-based funds), it’s hardly a trigger for asset allocation mix. By planning for capital gains, over income, it can be made more tax efficient.. Investors are better off in a combination of pure and to arrive at the intended
In short, reevaluate yourinto balanced funds. If you can stomach the ups and downs of the market and also seek high returns, go for pure . As William Shakespeare would say, what’s in a name?
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