The Securities and Exchange Board of India's (Sebi) proposed move to simplify category classifications of mutual fund (MF) schemes might lead to a change in the definition of balanced funds.
Sebi has been going slow on approving balanced funds in the past few years, unofficially insisting on a 50:50 equity to debt mix for new ones. At present, there is no standard definition.
Several fund houses offer balanced schemes that have an equity allocation of 65 per cent or higher. This allows them to be also classified as equity schemes, which enjoy a tax advantage over debt funds, as capital gains become tax-free after a year. Since most diversified equity funds offer 70-100 per cent equity exposure, the regulator believes a balanced fund offering 65-75 per cent does not offer much differentiation, said sector officials.
Fund houses, however, have been reluctant to launch balanced schemes with a 50:50 mix, as these will lose on performance to older ones with higher equity allocation.
"When you say something is a balanced fund, it has to be a truly balanced fund. We don't want investors to regret later that they went by the nomenclature and didn't find the fund to be balanced at all," recently said G Mahalingam, wholetime member at Sebi.
Fund officials believe flows in this category will migrate to the older balanced schemes with higher equity allocation. "Within the industry, we have a caste system. So, if you came early and launched a balanced fund, you were given permission to launch multiple balanced funds. One could be a large-cap and one could be a mid-cap in which you could invest 90-95 per cent in equities. And, if you came late, you are told only a 50-50 debt to equity mix could be considered a balanced fund. It is important to create a level playing field," Kotak Mutual Fund managing director Nilesh Shah had said at a recent Business Standard event.
"Sebi might insist on merger of similar balanced schemes but is unlikely to ask fund houses to change the mandate or attributes of their older balanced schemes that invest more than 65 per cent in equities," added the chief executive of a fund, on condition of anonymity.
A large fund house recently engaged in a verbal spat with Sebi over merger of two of its two balanced schemes, according to sources. It had argued that merger would mean an unwieldy size and be detrimental to the interests of investors.
One way fund houses have got around Sebi's 50:50 diktat is by launching hybrid funds with an equity tilt. Since 2014, almost a dozen such schemes have hit the market, with equity allocation of about 65 per cent and the rest in debt instruments. However, these schemes are not classified as balanced funds and are more defensive in nature, as over 25 per cent of the equity holding is deployed for equity arbitrage.