What is a balanced benefit fund?
Balanced Benefit Funds (BAFs) are schemes that invest in a mix of debt and equity. While conventional hybrid funds keep their equity/debt allocation static and within certain set limits, BAFs have no such restrictions and dynamically shift their allocations. Generally, if market valuations are high, the fund manager can tilt the asset allocation towards debt; and when they become cheap, the distribution will increase to shares. Fund managers use a documented process to decide on an allocation between two assets, equity and debt. In a large number of schemes, the distribution of capital and debt varies from 30% to 100%, while some have the option to leave it in the range of 0% to 100%.
What asset allocation models are used?
All funds have their own internal models for making capital and debt allocation decisions. These models are created based on the fund manager’s strategy of what the asset allocation should be. Most funds use a pro-cyclical model that buys more shares when it sees a lower valuation. Fund managers can use a combination of fundamental and technical factors such as PE ratio, PB ratio and trend indicators such as daily moving averages to determine capital allocation. Some funds use a counter-cyclical model that increases capital allocation in rising markets.
What are the tax benefits of these funds?
The biggest advantage of these funds is that they are structured in such a way that they are taxed like equity funds for investors. When these funds reduce their exposure to equity, it ensures that the capital plus arbitrage component of the scheme is at least 65% of the corps, which helps it qualify for equity taxation. Investors will be required to pay a 10% long-term capital gains tax if they sell their units after holding them for one year.
What is investing to achieve long-term financial goals?
Every investor has future financial goals. Working out a path to that goal and investing in it is called goal-based investing. For example, if you want to plan a vacation abroad with your family in 2023, i.e. 12 months from now, this is a short-term goal. If you want to plan for higher education for your child, who is now three years old, you have 15 years and this is considered a long-term goal. Likewise, having 25 years left before retirement is also a long-term goal.