Those who have already invested in balanced funds need to reassess their position. If you had bought the balanced fund for the above-mentioned reasons — the first-time investor with a small amount to invest and looking for asset allocation — stay put.
But investors who were sold the dividend option of these funds as a source of tax-free income need to exit. "Dividend from any equity-oriented scheme is not fixed. It depends on fund performance and market conditions," says Kaustubh Belapurkar, director-manager research, Morningstar Investment Advisor India. Once the markets stop rising and these funds stop generating a surplus, they will stop paying a regular monthly dividend.
Investors who don't need the dividend should consider shifting to the growth option of these funds. "Remember that the switch will be considered a fresh investment and could have tax implications," says Belapurkar. Those who switch before one year will have to pay 15 per cent tax on the short-term capital gain. "An investor should let his investment complete a year before switching," says Belapurkar. If you have completed one year and shift by March 31, there will be no long-term capital gains (LTCG). After March 31, there will be a 10 per cent tax on LTCG. Even after March 31, there is still a possibility that you may not need to pay LTCG tax as gains up to Rs 100,000 are tax-free. Even if you exceed this limit, the outgo may not be high due to the grandfathering clause: The investor can choose to calculate gains either from the date of investment or the value of the fund on January 31.
If you are, say, a retiree, who needs a regular monthly income, again you need to exit these products. If you have not completed one year, pay the 15 per cent tax payable on short-term capital gains (STCG) and exit (wait only if the one-year deadline is close). Invest the money in a liquid fund, ultra-short term debt fund, or short-term debt fund and do a systematic withdrawal plan (SWP).
An individual looking for higher returns and capable of stomaching higher volatility may consider monthly income plans, which invest 25-30 per cent in equities and the rest in debt.