The Hindu Business Line : <I>Will they lose their balance? </I>

The Budget requires equity-oriented funds to have at least 65 per cent of their portfolio in stocks. How would this affect balanced funds such as Kotak Balance, HDFC Prudence and PruICICI Balanced Fund? I have invested in all three of them.

Amit A. Rao

You can hold your investments in all three funds. They have a reasonable track record within the universe of balanced funds and the Budget proposals are unlikely to have any immediate impact on returns. Yes, fixing the equity exposure at 65 per cent will imply some loss of flexibility, but most balanced funds already invest 60-70 per cent of their portfolio in stocks and may not need to make too many changes to be eligible for the tax breaks.

As the tax benefits for equity funds are substantial, most fund houses may alter the structure of their balanced products to enable holding 65 per cent of their assets in equities. Your holdings in balanced funds will, therefore, continue to be eligible for concessional rates of capital gains tax and exemption from dividend distribution tax.

No immediate impact

Investors need not worry about any immediate impact of these proposals on fund returns. One, with the proposals set to take effect from June 1, funds have a three-month window to make enabling provisions to their objectives and shuffle their portfolios, if need be, to meet the new norms.

Second, even after the proposals take effect, a balanced fund need not always retain its equity exposure at 65 per cent. As the equity exposure will be reckoned on the average of monthly closing numbers, the actual equity exposure in a month may dip lower than 65 per cent but the fund will still be eligible for tax breaks as long as the number averages out to 65 per cent at the end of a year. With fund houses taking a bullish view of the stock market, most balanced funds already have an equity exposure that is close to the required 65 per cent mark. Of the three funds you own, Kotak Balance and PruICICI Balanced Fund will not have to make immediate changes to their asset allocation because of the Budget. Both have about 68 per cent of their assets invested in equities. They have also maintained equity exposure at 65 per cent or more since early 2005.

Only the HDFC Prudence has a significantly lower equity exposure (at 61 per cent) and may have to increase this exposure if it is to comply with the new definition. The fund manager has taken the view that the proposed changes in the Budget will not have a material impact on the way he invests.

In the fund's view, when the returns from equities are modest, the tax benefits would not be material.

So, the allocation between equity and debt will continue to be based on the fund manager's view of the relative attractiveness of two markets. The fund will however, make the enabling provisions necessary to take advantage of the tax breaks.

Queries may be e-mailed to mf@thehindu.co.in, or sent by post to Business Line, 859- 860, Anna Salai, Chennai 600002.

Aarati Krishnan

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