Hold your equity-oriented funds for 1 year to avail tax benefits

Investment in domestic equities are eligible for a lower period, of 1 year, of holding to qualify as long-term capital gains and thus be exempt from taxation


I am looking to invest in one of these two mutual funds. Can you please explain the difference between these two?

a. ICICI Prudential Balanced Fund-Direct Plan

b. ICICI Prudential Balanced Advantage Fund- Direct Plan.

Kailash Shrivastava

Both these funds are from ICICI Prudential Asset Management Co. Ltd and can be categorized as equity-oriented hybrid funds, which are also known as balanced funds. Such funds invest at least 65% in domestic equity holdings and the remaining in cash or debt instruments. This level of investment in domestic equities ensures that the investments in these funds are eligible for a lower period of holding (1 year) to qualify as long-term capital gains (and thus be exempt from taxation).

So, if both these funds belong to the same category and are from the same fund house, what differentiates them? The difference is in the nature of their equity holdings. One of these funds—the ‘Balanced Fund’—is a classic equity-oriented hybrid fund. It invests in domestic equities in the stock market.

The other fund—the Balanced Advantage Fund—invests 30-40% in the stock market and another 30-40% in equity-derivatives. These investments are made in a manner to lower the risk of the overall equity portfolio. What all this means is that the Balanced Advantage Fund is an equity-oriented hybrid fund that is less risky than the classic Balanced Fund. However, that also means that the returns of this fund are likely to be lower than that of a classic balanced fund.

This difference is borne out in actual numbers as well. If you look at the performance of the Balanced Fund, you will see that it has returned 23% (annualized) in the past 3 years, and 19% (annualized) in the past 5 years. On the other hand, the Balanced Advantage Fund has returned 17% and 13% in the same periods.

If you are just looking for a good balanced fund—where a fund manager takes a call with respect to equity allocation depending on the market and you still get the benefits of equity taxation—you should go for the simple ICICI Prudential Balanced Fund. For most investors, this would be the choice. But if you are specifically looking for a low-risk option that would yield tax benefits at the time of redemption, then the Balanced Advantage Fund would be more suitable, as long as the prospect of slightly lower returns is fine with you.

What is expense ratio? Does it impact the net asset value (NAV) of a mutual fund scheme?

Chintan Kapoor

Expense ratio is the annual fee charged by a mutual fund for the service of managing your money and investing it on your behalf.

This fee takes care of several services provided to the investor by the fund house, such as: the cost of money management, the services of account maintenance, issuing statement, and money transfers.

If you are investing in a fund through a distributor, this fee would also include the trail fees given to the distributor for servicing you. If you are investing directly with the fund house (in other words, in a ‘direct’ plan), this fee will not include the distribution expense.

This expense ratio does impact the NAV of a fund on a daily basis. The declared NAV is net of the deduction of expenses as specified by the expense ratio. For example, if a fund’s expense ratio is 2%, and the NAV for the fund is declared 200 times a year (there are approximately 200 business days a year), then every day, the NAV of the fund, calculated as the value of assets held by the fund and divided by the number of outstanding units, will be reduced by 0.0001 before being declared.

Investors should first look at various performance parameters of a fund, to decide whether a fund is a consistent good performer and whether it fits into their portfolio. Going just by expense ratio would mean that you could have a mediocre fund in your portfolio, which has a low total expense ratio. But if two funds with comparable performance track records are available, it would be prudent to go with the fund that has a lower expense ratio.

Srikanth Meenakshi is co-founder and COO, FundsIndia.com.

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