MF Query Board

Readers are requested to send only one query at a time so that more readers get a chance. Have questions relating to any aspect of personal finance. Ask DSIJ at editorial@DSIJ.in and get your queries resolved. 

I am new to mutual funds and wish to start by investing in a reliable hybrid fund for the long term. So, how can I find the best suitable hybrid fund?
- Rashmi Jain

As a new mutual fund investor, you have chosen the right path to start your investment journey with hybrid funds. But before you move on to fund selection you should understand this category and its sub-categories. In hybrid schemes, the Securities and Exchange Board of India (SEBI) has classified seven sub-categories, as follows:

Conservative Hybrid Fund: This fund invests in both equities as well as debt. However, according to the SEBI guidelines, it can invest between 10-25 per cent of the total assets in equity and equity-related instruments and 75-90 per cent of the total assets in debt instruments.

Balanced Hybrid Fund: This fund can have 40-60 per cent of the total assets in equity and equity-related instruments and 40-60 per cent of the total assets in debt instruments.

Aggressive Hybrid Fund: It can invest 65-80 per cent of the assets in equity and equity-related instruments and 20-35 per cent of the assets in debt instruments.

Dynamic Asset Allocation Fund: Also known as Balanced Advantage Fund, it can have its total assets invested in equity and equity-related instruments as well as in debt instruments with no restrictions on asset allocation. This means that these funds have the liberty to switch between equity and debt dynamically.

Multi Asset Allocation Fund: This can invest its assets in at least three asset classes with a mandate of investing minimum 10 per cent of the total assets in each of the all three asset classes. However, investment in foreign securities would not be treated as a separate asset class.

Arbitrage Fund: It follows an arbitrage strategy. Such a fund needs to have minimum 65 per cent of the total assets invested in equity and equity-related instruments.

Equity Savings Fund: It can have minimum of 65 per cent of the total assets invested in equity and equity-related instruments and a minimum 10 per cent of the total assets invested in debt instruments. Further, it is mandatory for AMCs to state minimum hedged and non-hedged portion in the Scheme Information Document (SID).

A point to note is that asset management companies (AMCs) cannot have aggressive hybrid and balanced hybrid funds. They have to choose between the two. Thus, there are different kinds of funds available in the hybrid fund category. So, now the next question is which is more suitable for you? We would suggest you to completely avoid conservative hybrid and balanced hybrid funds. Further, as your investment horizon is for the long term, you can certainly avoid investing in arbitrage funds and equity saving funds. These funds are more suitable for investment below one year. Therefore, you would be better off investing in aggressive hybrid funds or balanced advantage fund or dynamic asset allocation fund.

Which is a better option: mutual fund or PMS? And what are the risks involved with investing in a PMS?

- Rajveer Rajguru

First of all, you should know that the minimum investment in portfolio management services (PMS) has been increased from  Rs25 lakhs to Rs50 lakhs and those who are existing PMS investors investing Rs25 lakhs will need to top up their investments to Rs50 lakhs. Secondly, there are a lot of reasons to not opt for PMS. The obvious reason is that you will need to invest a huge sum of Rs50 lakhs or more at one go. You cannot invest systematically via a systematic investment plan (SIP) or systematic investment plan (STP). Furthermore, PMS is not as tightly regulated as mutual funds. In case of mutual funds, the SEBI has clearly defined what fund houses can do and what they cannot.

Whereas in the case of PMS, claims of performance are very difficult to verify since they assert to have a customised portfolio for every investor while mutual funds calculate their NAV and disclose it every day. From the tax point of view as well, mutual funds have an advantage over PMS. In the case of PMS, you are simply giving authority to a PMS manager to buy and sell stocks on a regular basis. Therefore, all the purchase and sale transactions are taxed accordingly. So, if your PMS manager is selling something within one year, it will be liable for short-term capital gain taxation of 15 per cent plus cess.

On the other hand, if they are sold after a year, the gains over Rs one lakh would be taxed at 10 per cent. However, in the case of mutual funds, you are liable to capital gain taxation only when you realise your investments. You don’t have to pay any tax even if your fund manager is buying or selling every day. Even in terms of the cost structure, PMS is quite costly as compared to mutual funds. In fact, in case of mutual funds there is an upper limit provided for the expense ratio, whereas that is not the case with PMS. Therefore, we would recommend you to opt for mutual funds over PMS.