Team-BHP (https://www.team-bhp.com/forum/)

-   Shifting gears (https://www.team-bhp.com/forum/shifting-gears/)

-   -   The Mutual Funds Thread (https://www.team-bhp.com/forum/shifting-gears/105873-mutual-funds-thread-307.html)

Depends on your age and risk profile. I would suggest the following if you are in your 20s.
Nifty 50 and Nifty Next 50 to form a solid base for your investments.
A balanced fund to tide through the market ups and downs.
A couple of small cap or other funds which are of the High Risk High Reward type. All the best for your investing journey.

I looked into this a bit more and among the 6 funds listed by ValueResearch in this category,
* Bandhan Asset Allocation Fund (Moderate) is a FoF
* UTI Retirement Fund & Frankling Pension India Plan are listed as "Retirement Funds" under the Solutions-oriented category (thematic funds) by websites similar to ValueResearch and
* Similarly UTI Chidren's Career Savings fund is also listed a Solution-oriented / thematic fund and not under the Hybrid fund category by UTI itself

Hence I don't think the above funds are truly representative of the balanced hybrid category. The other two funds 360 ONE and WhiteOak Capital are very new launched only a 3-4 months ago. And both these are relatively newer AMCs as well.

Upon checking the SEBI MF categorization circular (2017), there is a clause mentioning that if an AMC has an Aggressive Hybrid fund, then they cannot offer a Balanced Hybrid fund as well. Since most AMCs already had the aggressive fund in their portfolio, I guess they were unable to launch a balanced hybrid one. This is also likely why older AMCs don't have funds in the Balanced Hybrid category.

My understanding is from 1st April 23 purchases in MFs having less than 35% equity will come under debt category from a taxation perspective. So gains from such funds will be taxed at slab rates and there is no LTCG or indexation available either. But yes, investments in this fund category last FY and prior will continue to have the earlier tax benefits.

All this said, I wonder what is the use-case or benefit of this particular Balanced Hybrid fund category. There are more efficient ways of building a balanced equity/debt MF portfolio or capping equity exposure for long-term.

Assuming that the intended investment is only towards equity MFs, I have a different take on the # of SIPs. Pick 1 index fund (Nifty or Sensex doesn't matter) and 1 Nifty Next 50 fund from established AMCs. The lower cost over time will help and you will have MF units in India's top companies.

Rather than investing more time into identifying, shortlisting funds from other categories apart from having to track/monitor them over time, you are better off focusing on enhancing your skills/ability to make more money :) and consequently invest more each year. I know this sounds contrarian, but I personally believe there is not much benefit in the long run from having funds across too many categories. The time spent in "managing" them can be invested in building our core competency - unless that competency is a finance/market professional.

As others have mentioned already, it makes eminent sense to consult a qualified advisor before making any investment decisions.

What is/are the goals for which you are making the investment? Link your investment to goal(s) and allocate the funds accordingly. Since the investment horizon is 10 years, equity is the way to go. I would recommend a Large cap and a Midcap/Small cap/Flexicap fund to start with and as you progress you may want to add the funds if the investment is going to be topped up every year.

Thank you for analyzing this in detail. Now we know why the AMCs, who are always on the lookout for more AUM are not able to launch funds in this category. I recalled from the Parag Parikh investor letter of 2023, that they see this category as a gap in their offerings and may launch a fund soon. See page 5 & 6 of the letter.

Looking at this category purely from a tax efficiency perspective, here is a thought experiment: I consider this category for my retirement (i.e. long term investment) and I start SWP post-retirement. Please note that while redeeming from an MF, only the redeemed amount is liable for tax. Combined with indexation benefit, I will have near zero tax liability.

I can't think of any other portfolio structure where I can get near zero tax liability with a reduced risk vis-a-vis a pure equity fund. I would keenly watch how PPFAS would present their case when they launch an NFO. They do seem to be more ethical (not AUM chasers) than other AMCs.

Are thee funds taxed as Equity or Debt ? I think indexation is only applicable for funds that are treated as equivalent to debt (like international funds)

EDIT :

Google suggests this. So taxation will depend on composition of fund. And indexation will be partially applicable.

Tax
In hybrid funds, the tax on gains is as follows:

Equity Component of the Hybrid Fund
This is taxed like equity funds:

Debt Component of the Hybrid Fund
This is taxed like any pure debt fund. The capital gains are added to your income and taxed as per the applicable income tax slab.

Long-term capital gains from the debt component are taxed at 20% after indexation and 10% without indexation benefits.

https://groww.in/mutual-funds/hybrid-funds

Hello

Useful info to study before investing in a stock or MFs at the current time

1. Fn0- %stocks ABOVE respective EMA LEVELS

2. Nifty 50 %-stocks ABOVE respective EMA LEVELS

3. Nifty 500 %stocks ABOVE respective EMA LEVELS ....(better than Nifty)

regarding taxation of mutual funds, my understanding is that there are 3 categories

1> Pure equity funds - equity holding>65% are taxed like pure equity funds. Holding period of >1 year considered as Long term and taxed at 10% of capital gains (1lkh exemption). Holding period of <1 year are taxed as short term capital gains at 15%

2> Pure debt funds - equity holding <35% are taxed like pure debt funds where all capital gains are taxed as per income tax slab rate. Also, if the investment is done before April1, 2023, then these funds get indexation benefit (see #3 below)

3> Hybrid/in-between category - here equity holding is between 35% and 65%. In this case, holding period of <3 years are considered short term and taxed as per income tax slab rate. For holding period >3 years, these are considered as long term and taxed at 20% minus indexation, which makes this category tax-efficient. I believe many of the balanced advantage or dynamic asset allocation funds might fall under this category. I am still doing some more research about this category as I am planning to invest because of the tax-efficient.

PPFAS Mutual Fund applies for dynamic asset allocation scheme with SEBI

Source: moneycontrol

So instead of launching a Balanced Hybrid category i.e. 35% < Equity% < 65% as I had interpreted their investor newsletter, they have launched a Dynamic Asset allocation fund i.e. 0% < Equity% < 100%. This is slightly disappointing as a credible fund in the balanced hybrid cateogory is badly needed, whereas every AMC offers a Dynamic asset allocation fund. I have invested in couple of HY-DAA funds.

Had a question on HY-DAA funds. Since the taxation of a HY-DAA fund is dependent on whether the fund maintained average Equity holding > 65% or not, is it the investor's responsibility to keep track of the portfolio or the capital gains statement reflects the portfolio based taxation correctly?

I had to trace this comment as it's mention somewhere else led me to reflect critically on my own understanding. In essence, you're correct, but let me try to summarize it differently, because I think it may confuse a lot of folks. Please correct me wherever I may be wrong:

1. Compounding as a basic concept comes from compound interest: In every cycle, interest earned in the previous cycles earns even more interest, leading to compounding.

2. Market or market linked investments may not have profits in every cycle, but any growth in each cycle, positive or negative, is still "compounded". If your 5 year MF had a -10% return in the 3rd year, then think of it as a term deposit that earned a compound interest of -10% in its 3rd year. In other words, volatility doesn't mean that there is no compounding, which is why you have Growth and IDCW type of MFs. Compounding here just means "let the entire amount, principal as well as profits, stay invested."

3. At the end of the day, compounding formulas, or CAGR in particular, is used as a common benchmark to compare all investments. For instance, one can argue that there is no compounding in the capital growth of a real estate investment. But that is not the point of applying this formula as a benchmark. The point is to compare the returns.

4. In any investment, one has to consider the unpredictable cycles of the market. If you are invested in a market of any kind, whether it is equities, bonds or even real estate, you need to add a buffer period at the end of your planned investment period. For example, if you have purchased a home for your kid's education, plan to liquidate it anytime as soon as you are 5 years away from when you will need the money, as the market may not be ripe exactly when you think you should exit it.

Agreed this is the basic principle of compounding

I have a different perspective compared to yours here. There is no actual "interest" being paid out in a growth equity MF as an example. While the original amount could 'earn' notional profit/loss each year or at different points in time, there is nothing to 'compound' the initial investment itself. If the NAV and consequently gain continues to rise over the years, I believe it is not due to compounding but due to growth in value of original investment.

I mentioned volatility in market instruments only to call out that MF returns are not linear/smooth as typically called out in media. The Sensex growth from inception chart is a great example of how equities are shown to provide positive returns in the long term. If we instead look at rolling returns, we would see the market volatility - down-turns more clearly. In the example of the 5-year MF, there is no guarantee that I make a positive return at the end of the duration as possibly 4 years of gains can get wiped out in the 5th year. Or conversely the initial years of losses may be made good by 1-2 years of superlative returns. End of the day, my gain/loss will depend on where in the market cycle my 5 year MF term is - up or down. Also I don't understand how Growth/IDCW types of the same MF link back to compounding. Even in Dividend type of MFs, once the funds profits are distributed to the unit holders, the NAV is reduced correspondingly as you would know already.

Exactly, CAGR is a good benchmark to compare different types of instruments. Where CAGR returns make absolute sense for instruments that provide interest and hence allow compounding (FDs, RDs etc.), in the case of market-linked instruments like FDs or real-estate, it is at best a comparison tool only.

Where confusion would start with CAGR and MFs is by assuming that this is the return for every past year invested in the MF. Worse still is assuming that this is the expected return going forward annually. The disclaimer about past performance not being continued in future (be it positive or negative) is something we would do well to heed.

Again, I agree with you in principle. It is not like you invest in an equity MF for a goal 10 years away and project equity returns to validate if the corpus is achievable. The same applies for any instrument. Closer to the goal, the required amount needs to be transferred to an ultra-safe option to avoid capital and profit erosion.

I have invested in the ICICI Balanced Advantage Fund which is a DAA fund. The fund document clearly mentions that taxation will be as an equity fund only as they will ensure the gross equity holding will be 65% or higher though net equity holdings could be lesser due to hedging via derivatives. Need to read this more thoroughly to understand what it actually means :confused:

I also checked HDFC Balanced Advantaged Fund from their website and it also similarly mentions min equity / equity instruments holding will be 65% qualifying it for equity fund taxation. I expect this would be a similar approach followed by other BAFs/DAAs too but haven't checked the details myself.

In any case, I don't believe the investor has the responsibility to figure out if capital gains from their DAA should be taxed as equity or debt MF rules. The DAA SID or fund factsheet should contain this info.

I was trying to summarise compounding as a "let profits from one cycle earn more profit in the next cycle." Depending on the instrument, only the exact term for profit changes; interest in case of an FD, capital gains in case of a Growth MF and dividends in case of an IDCW MF. Growth type of MF can be thought of having "compounding" because the profits are reinvested whereas that is not the case in IDCW type MFs.

The difference in our opinions seems to be based on what basis we use to explain compounding. In your case, it is based on interest, in my case, it is based on profit. What you're trying to communicate is correct - don't let the media fool you that returns from equities are as consistent as consistent or regular as interest from debt based investments, but the principle of compounding (based on reinvesting profits) still applies to both.

In fact, here is something interesting. Compounding in case of an FD is actually lesser than in case of equities/MFs. Tax is to be paid in every year of the FD even if it doesn't mature yet, so that reduces the profit that is reinvested, and hence reduces the compounding effect. But in case of equities/MFs, profits are taxed only on redemtion, hence, more compounding.

I think we tend to confuse the financial term of profit and mathematical term of compounding. The only relevant data is the difference of NAV at two points in time.
Some MF advisories state that any "value addition or compounding" due to the company's profits which are reinvested in their operations, ultimately reflect in the stock performance, further ends up in higher NAV, which is almost a tertiary effect as far as us MF investors are concerned.
The fact is, most decent AMCs have been able to demonstrate a net positive difference in the NAV over a long period of time in case of growth type of MFs. That cannot be termed as "compounded" in any sense. Honestly, the term itself must be barred from being used by the AMC or any investment advisory.

Compounding and how it should not be used in stock/MF has been discussed way too much than necessary. In my humble opinion, all that everyone is doing is trying to find a level field to compare different type of investments - FD, real estate, gold, MF. All that matters is we understand what is being conveyed and move on.

To me XIRR, compounding, etc all help to make a judgemental call and none of these will individually change my opinion on an investment vehicle.