But there was a reason for this lopsided allocation. In order to qualify as an equity scheme, a minimum equity allocation of 65% is required. Since, equity schemes enjoy a tax advantage over debt schemes, an additional 15% exposure did not seem to do much harm. At the end of the day, investors would benefit.

However, most schemes classified as Balanced Funds were free to vary their exposure to equity, ranging from a minimum 65% to as much as 80%. This drew a lot of flak from the regulator.

After years of deliberation, the regulator had its way by coming out with the Categorization and Rationalization of Mutual Fund Schemes. This reform has the sole objective to create uniformity among the different categories of schemes managed by various fund houses.

Likewise, under Hybrid Funds, the regulator introduced as many as six categories, namely –

Type	Sub-categories (classes)	Characteristics
Hybrid	Conservative Hybrid	Investment in equity & equity related instruments will be between 10% to 25% of total assets and debt instruments will be between 75% to 90% of total assets.
	Balanced Hybrid or Aggressive Hybrid (Mutual Funds will be permitted to offer only one)	Balanced Hybrid Funds will invest 40% to 60% of total assets in equities and 40% to 60% in debt instruments. No Arbitrage would be permitted in this scheme. Aggressive Hybrid Funds will invest 65% to 80% of total assets in equities and 20% to 35% in debt instruments.
	Dynamic Asset Allocation or Balanced Advantage	The schemes allocation to equity and debt will be managed dynamically.
	Multi-asset Allocation	The scheme will invest in at least three asset classes with a minimum allocation of atleast 10% each in all three asset classes.
	Arbitrage	The scheme will follow arbitrage strategy and invest minimum 65% of its total assets in equity & equity related instruments.
	Equity Savings	The scheme will invest minimum 65% in equity & equity related instruments and a minimum 10% in debt instruments. The schemes minimum hedged & unhedged is to be stated in the SID, while its asset allocation under defensive considerations may also be stated in the Offer Document.

(Source: sebi.gov.in, PersonalFN Research)

To know more about other categories and scheme change read our article - Your Mutual Fund Scheme Renamed. What Should You Do? This article will be constantly updated as and when new scheme name changes or classification are announced.

Coming back to equity-oriented Hybrid Funds, fund houses can classify their schemes as either a Balanced Hybrid or Aggressive Hybrid Fund – they can choose only one. They could also classify the scheme as a Balanced Advantage Fund. Schemes that have multiple schemes within the erstwhile balanced fund category, can choose among these options.

While most fund houses are yet to decide how to categorise their schemes, we take a closer look at each of these categories and their suitability to your risk profile.

Balanced Hybrid Funds: True to its name

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Balanced Hybrid Funds are pure balanced funds that invest around 50% of their assets in equity and the balance in debt. Here, hedged equity positions or arbitrage exposure is not allowed. While these fund offer investors an equal exposure to equity and debt, they are not very tax efficient.

As these funds qualify as non-equity schemes, gains on units redeemed before the completion of 36 months is considered as Short-term Capital Gains (STCG). These gains are added to your income and taxed accordingly. Therefore, if you fall in the highest tax bracket, the tax liability can go up to 35.54% (30% tax plus 15% surcharge and 3% cess).

Long Term Capital Gains in case of non-equity funds are taxed at 20% with indexation (23.69% including surcharge and cess).

While such a fund is suitable for moderate risk profile investors, the tax implications are a deterrent.

In terms of performance, schemes investing as per such an asset allocation have been virtually non-existent, as fund houses preferred keeping the exposure in excess of 65%. Hence, there are no funds with a reliable track record of performance.

Aggressive Hybrid Funds: Old wine in a new bottle

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As most existing Balanced Funds maintained an aggressive equity allocation, fund houses have already or may soon classify them under Aggressive Hybrid Funds. It is unlikely to see many fund houses classify funds under the Balanced Hybrid Fund category, as these schemes do not give investors a tax advantage.

Read here to view the entire list of mutual fund scheme name changes and re-classification

Fund houses have been innovative to add hedged equity exposure or arbitrage to build up the total equity allocation. For example, if the fund has long equity exposure of 45%, the fund manager invests 20% of the assets in arbitrage opportunities to build up the equity exposure to 65%.

The term ‘Arbitrage’ refers to the simultaneously buying and selling of a security in two different markets, with an aim to gain from the price difference. Since, the transactions are in either direction, the positions are completely hedged. Hence, arbitrage transactions are virtually risk-free and are capable to earn a return ranging between 6%-8%.

Under Aggressive Hybrid Funds, a minimum debt allocation of 20% is specified. Unlike Balanced Hybrid Funds, where no Arbitrage is permitted, Aggressive Hybrid Funds have the flexibility to include an arbitrage exposure.

If your balanced fund classification has changed to an Aggressive Hybrid Fund, in all probability you need not worry. The scheme is likely to stick to its existing investment strategy, though there may be a change in the fund name and minor changes in the asset allocation.

List of funds categorised as Aggressive Hybrid Funds:

Old Name	Old Category/Type	New Name
ABSL Balanced '95 Fund	Balanced	ABSL Equity Hybrid '95 Fund
BNP Paribas Balanced Fund	Balanced	BNP Paribas Substantial Equity Hybrid Fund
BOI AXA Mid Cap Equity & Debt Fund	Balanced	BOI AXA Mid & Small Cap Equity & Debt Fund
Canara Robeco Balance	Balanced	Canara Robeco Equity Debt Allocation Fund
DHFL Pramerica Balanced Advantage Fund	Balanced	DHFL Pramerica Hybrid Equity Fund
DSP BlackRock Balanced Fund	Balanced	DSP BlackRock Equity & Bond Fund
Franklin India Balanced Fund	Balanced	Franklin India Equity Hybrid Fund
HSBC Managed Solutions India - Moderate	Balanced	HSBC Managed Solutions India - Moderate
ICICI Prudential Balanced Fund	Equity Oriented Hybrid Fund	ICICI Prudential Equity & Debt Fund
IDFC Balanced Fund	Balanced	IDFC Hybrid Equity Fund
L&T India Prudence Fund	Balanced	L&T Hybrid Equity Fund
Mirae Asset Prudence Fund	Equity oriented asset allocation	Mirae Asset Hybrid - Equity Fund
Reliance Regular Savings Fund – Balanced Option	Balanced	Reliance Equity Hybrid Fund
SBI Magnum Balanced Fund	Balanced	SBI Equity Hybrid Fund
Shriram Equity and Debt Opportunities Fund	Balanced	Shriram Equity and Debt Opportunities Fund
Sundaram Balanced Fund	Balanced	Sundaram Equity Hybrid Fund
Tata Balanced Fund	Balanced	Tata Hybrid Equity Fund
UTI Balanced Fund	Balanced	UTI Hybrid Equity Fund

(As announced by fund houses through Notices or Addendums)

Aggressive Hybrid Funds, though maintain a lower equity exposure, are not devoid of risk. The volatility is marginally lower when compared to a pure equity schemes. Hence, such funds are suitable for newbie investors who are not very familiar to stock market volatility. Anyone with a moderate-to-high risk profile can consider investing in such schemes.

When it comes to choosing a fund, pick a scheme with a dependable track record. Do consider both the quantitative and qualitative aspects of the fund.

If you wish to invest in potentially the best Aggressive Hybrid Funds, you can consider subscribing to PersonalFN’s FundSelect service.  ‘FundSelect’— is a research report that offers honest and unbiased mutual fund recommendations, summarizing the reasons to buy/hold or sell a scheme in a crisp form. Subscribe now! for exclusive limited period offers.

Dynamic Asset Allocation or Balanced Advantage Funds: A shot at market-timing

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As the name suggests, the funds under this category can dynamically manage the asset allocation with no restriction on the minimum or maximum exposure. The fund can choose to be fully allocated either to equity or debt instruments depending on the fund manager’s view of the market.

Certain Dynamic Funds have a formula driven approach that takes in to consideration market valuations and other factors. The allocation is pre-decided based on the formula that defines the equity exposure based on the different variables.

Though Balanced Advantage funds also set their asset allocation as per the direction of the market, they tend to keep a minimum 65% exposure to equity at all times.

However, to qualify as an equity scheme, even if the unhedged equity exposure or long equity positions falls below 65%, the fund house can compensate for it with arbitrage positions. Thus, the fund can remain dynamic and tax-efficient at the same time.

There are several Dynamic Asset Allocation and Balanced Advantage funds in existence. The problem lies for fund houses who offer both types of schemes to investors. As per SEBI’s circular, fund houses can keep only one category.

As a result, some fund houses are classifying their Dynamic Funds as Multi-asset Funds, which allows them to invest in three asset classes with a minimum of 10% allocation to each asset.

ICICI Prudential Mutual Fund for example, offers both options – ICICI Prudential Balanced Advantage Fund and ICICI Prudential Dynamic Fund. While the fund has retained ICICI Prudential Balanced Advantage Fund as it is, ICICI Prudential Dynamic Fund will be classified as a Multi-asset Fund and will be renamed as ICICI Prudential Multi-Asset Fund. The fund will now need to invest a minimum 10% of its assets in Gold ETFs or REITs/INVITs.

List of funds categorised as Balanced Advantage Funds:

Old Name	Old Category/Type	New Name
Edelweiss Dynamic Equity Advantage Fund	An open-ended Equity scheme	Edelweiss Balanced Advantage Fund
ICICI Prudential Balanced Advantage Fund	Equity Oriented Hybrid Fund	ICICI Prudential Balanced Advantage Fund
Reliance NRI Equity Fund	Multi Cap Fund	Reliance Balanced Advantage Fund
Union Prudence Fund	Equity oriented hybrid fund	Union Balanced Advantage Fund

(As announced by fund houses through Notices or Addendums)

As an investor, you need to take a closer look at the asset allocation strategy of such funds. If the fund chooses to continue with the investment strategy as before, you need not worry. However, if there is a change in investment attributes, it will warrant a closer look – The past performance of such schemes cannot be considered.

Such funds suit moderate-to-high risk profile investors, given that the funds would invest predominantly in equity assets. While the fund may try to reduce volatility by dynamically managing the unhedged equity exposure, very few funds have been successful in doing so. Hence, if will be pertinent to have a look at the historical performance of the fund before investing.

How well such funds perform is highly dependent on the fund managers’ skill and experience, as well as the formula adopted to set the asset allocation.

Which of these fund categories is a better option?

As you can see from above, the Aggressive Hybrid Fund category is the more promising of the lot. There are a variety of schemes you can choose from. The asset allocation will be stable and the returns tax-efficient, hence, you will be able to fit in such funds seamlessly in to your financial plans.

If you require some handholding on the path to wealth creation, to create a customised investment portfolio, or need to organise a financial plan in place, seek guidance from our Financial Guardian who can assist you in an unbiased and objective manner. Schedule a call here.

Editor’s note: If you’re unsure where to invest fresh investible surplus currently, to strike the correct risk-return trade-off we recommend adopt a ‘core and satellite approach’ to investing. Here are 6 benefits of ‘core and satellite approach’: Facilitates optimal diversification; Reduces the risk to your portfolio; Enables you to benefit from a variety of investment strategies; Aims to create wealth cushioning the downside; Offers the potential to outperform the market; and Reduces the need for constant churning of your entire portfolio  ‘Core and satellite’ investing is a time-tested strategic way to structure and/or restructure your investment portfolio. Your ‘core portfolio’ should consist of large-cap, multi-cap, and value style funds, while the ‘satellite portfolio’ should include funds from the mid-and-small cap category and opportunities style funds. But what matters the most is the art of astutely structuring the portfolio by assigning weightages to each category of mutual funds and the schemes you select for the portfolio.  Moreover, with change in market outlook the allocation/weightage to each of the schemes, especially in the satellite portfolio, need to change. Keep in mind: Constructing a portfolio with a stable core of long-term investments and a periphery of more specialist or shorter-term holdings can help to deliver the benefits of asset allocation and offer the potential to outperform the market. The satellite portfolio provides the opportunity to support the core by taking active calls determined by extensive research. So, PersonalFN offers you a great opportunity, if you’re looking for “high investment gains at relatively moderate risk”. Based on the ‘core and satellite’ approach to investing, here’s PersonalFN’s latest exclusive report: The Strategic Funds Portfolio For 2025 (2018 Edition). In this report, PersonalFN will provide you with a readymade portfolio of its top equity mutual fundsschemes for 2025 that have the ability to generate lucrative returns in the long run. PersonalFN’s “The Strategic Funds Portfolio for 2025” is geared to potentially multiply your wealth in the years to come. Subscribe now!

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