FUND FULCRUM

January 2013

After two consecutive years of plunge, the mutual fund industry managed to register a smart turnover in 2012, with its assets base seen nearing Rs 8 lakh crore with an increase of about Rs 2 lakh crore in 2012. Touching the highest level in nearly three years, the assets managed by mutual funds jumped by more than 5% to Rs 7.86 lakh crore in the three months ended December 2012. The country's 44 fund houses together had an average AUM (Asset Under Management) of Rs 7,86,543 crore in the October- December quarter of 2012, up from 7,47,333 crore in the previous three-month period. This is the highest level since September 2010 (when AMFI started declaring quarterly average numbers) and the third consecutive quarterly gain in mutual fund assets. Further, assets grew by 15%, or Rs 1.05 lakh crore, in the calendar year 2012 versus 1% growth in 2011. The total industry AUM stood at Rs 6.11 lakh crore at the end of 2011, while the same was about Rs 6.26 lakh crore at 2010-end and Rs 6.65 lakh crore in 2009. The rise in AUMs is due to sharp inflows into long-term debt and government securities (gilts) on expectations that the Reserve Bank of India, or RBI, would start lowering key interest rates soon. Bond yields and prices move inversely. As some wide-ranging reforms, initiated by the market regulator SEBI and the government, are yet to translate into true business gains for the investors and fund houses, the industry is hopeful of even better days ahead in 2013.

Inflows in income and liquid funds have contributed the most to the industry's rising AUM. With inflows of Rs 89,302 crore, money market funds AUM surged to Rs 1.77 lakh crore. A similar trend was seen in liquid funds, where inflows rose to Rs 80,880 crore taking the assets managed by the fund to Rs 3.87 lakh crore.
Similarly, equity funds' AUM rose to Rs 1.65 lakh crore despite registering outflows of more than Rs 9,300 crore. AUM of equity linked savings scheme too increased to Rs 25,027 crore though it saw investors pull out over Rs 1,400 crore in 2012.Interestingly, equity fund managers of mutual fund industry have betted big on banking space with investments worth more than Rs 42,000 investment, which was 20.59% of the industry's total equity assets under management.

The total AUM of all the fund houses put together has soared by an impressive 30% on strong inflows in categories such as fixed income, gold schemes, and liquid funds, according to industry estimates. About 80% of the fund houses logged a rise in the average AUM in the December 2012 quarter. L&T Mutual Fund registered the highest growth in assets in absolute as well as percentage terms. The fund house’s assets grew by more than three times from Rs 3,900 crore to Rs 12,100 crore in the latest quarter mainly due to the addition of Fidelity Mutual Fund’s AUM post completion of its acquisition of the latter in December 2012. Fidelity Mutual Fund had reported an average AUM of Rs 7,100 crore in the September 2012 quarter as per AMFI data. In absolute terms, ICICI Prudential Mutual Fund followed with its average assets up by Rs 5,000 crore to Rs 81,400 crore in the December 2012 quarter. In percentage terms, BOI AXA Mutual Fund recorded the second highest rise of 142% to end with assets of Rs 700 crore. Among losers, Daiwa Mutual Fund declined the most, in percentage terms, by nearly 32% in assets to end the quarter at Rs 500 crore. HDFC Mutual Fund retained its top average AUM position across fund houses in the December 2012 quarter with respect to total assets managed. The fund’s average AUM was up by Rs 3,600 crore or 3.7% to Rs 1,01,000 crore. Reliance Mutual Fund maintained the second position at Rs 90,600 crore, up by 5% or Rs 4300 crore. ICICI Prudential Mutual Fund was ranked third in the asset tally at Rs 81,400 crore; its average assets were up Rs 5000 crore or 6.6%. The share of top 5 mutual funds’ assets was 54% in the December 2012 quarter while the share of top 10 funds’ assets was 77%. The bottom 10 fund houses continued to occupy less than 1% of the AUM.

Piquant Parade

Capital market regulator, SEBI, has cancelled the registration of Fidelity Mutual Fund following its buyout by L& T Finance. Consequently, Fidelity Mutual Fund, FIL Trustee Company, and FIL Fund Management cannot carry out any activity as a mutual fund, trustee company and asset management company, respectively, with immediate effect. In November 2012 L&T Finance, a part of diversified group Larsen & Toubro, had completed the acquisition of Fidelity's mutual fund business in India for an undisclosed amount. L&T Finance is a part of engineering conglomerate L&T Group and Fidelity Mutual Fund is part of the US-based Fidelity Worldwide Investment.

ICICI Prudential Mutual Fund bagged the best asset management company award at the Money Today - Financial Planning Corporation (FPCIL) Awards held in Mumbai. Franklin Templeton won the best equity fund house award while DSP Black Rock walked away with the best debt fund house award.  The best AMC was awarded based on parameters like product education and awareness for customer, training of agents and customers, number of complaints raised by customers, average turnaround time for resolution of complaints, regulatory compliance, compliance with regulations, penalties paid under various categories during 2011-12. The best performing fund houses were selected on the basis of scheme return along with weighted average yearly performance across all schemes as on 31 March 2012, quality of the asset base, determination of internal prudence limits, size and scale, assets under management, number of employees, number of retail investors and AUM for retail investments, product effectiveness, sector product diversification, product innovativeness, etc.

Regulatory Rigmarole

In a move to regulate mutual fund distribution business, SEBI has notified regulations to set up a Self Regulatory Organisation (SRO) to monitor distributors of mutual fund and portfolio management products on January 8, 2013.

In a bid to boost the number of distributors and enhance mutual fund sales, AMFI has decided to waive registration fees, estimated at Rs 3,000, for all registrations of first time distributors for a period of five months from February 01, 2013 to June 30, 2013. This initiative is largely with the intention of enlarging the distribution network and attracting new cadre of Distributors/IFAs (Independent Financial Advisors) for selling mutual fund products. The distributors registering under the category of individuals (including senior citizens) and new cadre of distributors need not pay the registration fees if they register during the same period and fulfill conditions outlined by AMFI. In November 2012, AMFI had slashed registration fees to Rs 3,000 for three years per distributor from Rs 5,000. NISM has launched the much-awaited one-day certification for the new cadre of distributors. These distributors include postal agents, retired government and semi-government officials (class III and above or equivalent) with a service of at least 10 years, retired teachers with a service of at least 10 years, retired bank officers with a service of at least 10 years, and bank correspondents. People qualifying as new cadre of distributors can either pass the existing NISM-Series-V-B: Mutual Fund Foundation Certification Examination or complete a one day NISM Mutual Fund Foundation CPE Program. These certificates will be valid for three years.

The government is considering an expansion in the scope of the Rajiv Gandhi Equity Savings Scheme (RGESS) to attract more small investors to stocks. RGESS currently offers tax breaks to new investors who do not have a demat account—an electronic registry for stocks and debentures—or have a demat account, but are yet to invest in equities. The government may now extend the scheme to investors with some equity investments. RGESS allowed retail investors with no exposure to equities and annual income of up to Rs10 lakh to invest a maximum of Rs 50,000 in stocks and deduct half the amount from their taxable income. Going by the current income-tax rate, this translates into a saving of a little more than Rs 7,500 for taxpayers who invest Rs 50,000.The government is also exploring the possibility of raising the tax benefit as well as the maximum investment allowed under the scheme. For instance, the tax benefit may be raised from the current 50% to 100%. This means an investor will save at least Rs 15,000 in tax on an investment of Rs 50,000. The maximum investment permissible may also be raised from Rs 50,000 to Rs 60,000, or even more. The scheme was notified in December 2012 by SEBI. The government initially insisted on direct investment in stocks, but SEBI also allowed investments through mutual funds to be eligible for tax benefits under the scheme. According to SEBI’s notification, securities eligible for investment should belong to the BSE-100 or CNX 100 indices; investments in shares of some high-profile public sector units are also eligible. Several mutual fund houses are linking some of their investment plans to RGESS, but most of them are not very upbeat, given the complexity of the scheme.

SEBI registration is a must for all investment advisors — both individual and corporate, according to a new regulation by market regulator SEBI. However, professionals such as lawyers, chartered accountant and those giving generic view on economic situation without charging and incidental to discharging their professional services are exempt according to a SEBI notification on January 21, 2013. SEBI has mandated a minimum net worth requirement of Rs 25 lakh for corporate and Rs 1 lakh for individuals. The new Investment Advisors Regulations seek to impose numerous compliances on the investment advisors from the perspectives of disclosures, record maintenance, and risk profiling of clients. The regulations prescribe minimum educational qualifications, capital requirements, infrastructure requirements and personnel requirements such as compliance officers. The regulations also bar advisors from earning any remuneration other than fees from investors. SEBI also seems to be contemplating a scenario wherein once a SRO is identified, the regulation of investment advisors may be delegated to such a body. In the absence of such delegation, it would be a daunting task for SEBI to regulate hundreds of thousands of investment advisors. Hence the new regime would be challenging for both investment advisors and SEBI.

An assessment by the International Monetary Fund has found significant improvement in SEBI’s implementation of IOSCO’s (International Organisation of Securities Commissions) principles related to the securities markets. In its evaluation of the 25 systemically important economies including India, IMF said SEBI’s regulations for every market participant (including issuers, collective investment schemes, brokers, portfolio managers, underwriters and recognised regional stock exchanges) are robust. IMF observed that SEBI’s efforts in recent years to build a robust market surveillance system as well as separate investigation and enforcement departments have translated into effective enforcement of unfair trading practices. IMF pointed out that SEBI faced three challenges in the form of supervision of intermediaries (including fund managers and the mutual funds they administer), improve its mechanisms to ensure compliance of issuers with reporting requirements and develop better mechanisms to ensure compliance with accounting and auditing requirements. It said SEBI’s decision to rely on exchanges for self regulation or reviewing information submitted by listed companies itself or leaving it to a quality review board for independent oversight of auditors, will impact regulator’s resources. Though SEBI was independent in practice, it could be superseded by the Government on policy matters and its members could be removed without cause. The credibility of the supervisory process would be strengthened further if these provisions were remedied. The IMF said the securities market infrastructure in India is segmented by product type, which could raise concerns on the overall efficiency of the capital market. They are traded, cleared, and settled through different entities subject to different legal frameworks and regulators. The cooperation between RBI and SEBI on payment and settlement systems would benefit from formal arrangements for information sharing and policy coordination.

Forty-two mutual funds investing in Asia stormed into the list of the world's top 100 best performing equity funds in 2012 as regional markets from India to Southeast Asia rallied. The top 100 list includes 14 equity funds each from Pakistan and Thailand and nine from India, according to an analysis of data for 27,153 actively managed equity mutual funds tracked by Thompson Reuters Lipper globally. The Karachi Stock Exchange's benchmark 100 share index surged 49%, while Bangkok's benchmark SET index finished 35.8% up last year, making them the two best performing share markets in Asia. The Asia-focused funds produced an average return of 61.5%, outperforming the top market in the region as well as the 18.6% advance in the MSCI's broadest index of Asia-Pacific shares outside Japan. Nearly 7,300 equity funds investing in Asia and tracked by Lipper returned an average of 17.9% in 2012. By comparison, non-Asian funds gained 13.3%. 

NFONEST

January 2013

RGESS – the new tax-saving mantra?

Fund houses are rushing to file offer documents for Rajiv Gandhi Equity Savings Scheme (RGESS). RGESS was announced in the Union Budget 2012-13 for first time retail equity investors, offering investors a tax benefit for investments up to Rs 50,000 for those who earn up to Rs 10 lakh under a new section of 80CCG. Currently investors can avail tax benefit for investments of up to Rs 1 lakh under section 80 C of the Income Tax Act through equity linked savings scheme (ELSS). Existing mutual fund investors who have not invested in equity markets directly could also be eligible for RGESS if they meet the other criteria. In such a situation where existing mutual fund investors are eligible, AMCs can tap their existing investors. Given the huge number of PAN cardholders who do not possess a demat account, the potential is big. There were more than 12 crore PAN cardholders in 2011 and around 1.25 crore demat accounts registered with NSDL and 80 lakh with CDSL as of now.

Last month, DSP BlackRock had filed an offer document with SEBI to launch its RGESS. Now, SBI and IDBI Mutual Fund have also filed their offer documents with the regulator. Fund houses are expecting to get a nod from SEBI promptly as the tax season comes to an end in March 2013. AMCs have three months’ timeframe to reach a pool of first time equity retail investors. Reliance has earlier filed an offer document for R*Shares CNX 100 ETF which it plans to convert into RGESS. Quantum Mutual Fund is tweaking its Quantum Index Fund ETF into RGESS. Peerless Mutual Fund is also in the process of filing an offer document for launching an ETF based RGESS. Religare Mutual Fund has announced that Religare Nifty ETF qualifies for RGESS.  Four of Goldman Sachs ETFs are eligible for RGESS.

Marginal Equity Funds dominate the January 2013 NFONEST, but some pure equity NFOs are in the pipeline.

DSP BlackRock Dual Advantage Fund Series – 11 (36 M)

Opens: January 7, 2013

Closes: January 21, 2013

DSP BlackRock Dual Advantage Fund – Series 11 - 36M has maturity time of 36 months from the date of allotment. The asset allocation of the fund will be in such a way that the objective of the fund to generate returns and seek capital appreciation will be met through investment in a portfolio of debt and money market securities. The fund also seeks to invest a portion of the portfolio in equity and equity related securities to achieve capital appreciation. Hence, the fund will allocate 50 to 95% of assets in debt securities, 0 to 25% in money market securities, and 5 to 25% in equity and equity related securities. The debt portfolio will invest only in securities that are rated investment grade by a rating agency. In the equities portfolio the fund manager will adopt a top down approach. The fund expects to achieve down side protection by investing in debt securities maturing on or before the duration of the fund. The fund expects the equity exposure to help investors achieve moderate returns. The performance of the fund will be benchmarked against CRISIL MIP Blended Fund Index. Dhawal Dalal and Apoorva Shah will be the Fund Managers.

ICICI Prudential Capital Protection Oriented Fund III - Plan E (60M)

Opens: January 17, 2013

Closes: January 28, 2013

ICICI Prudential Capital Protection Oriented Fund III - Plan E - 60 Months Plan is a close ended capital protection oriented fund. The tenure of the fund is 1825 days. The investment objective of the fund is to seek to protect capital by investing a portion of the portfolio in highest rated debt securities and money market instruments and also to provide capital appreciation by investing the balance in equity and equity related securities. The securities would mature on or before the maturity of the plan. The fund will allocate 70% to 100% of assets in debt securities and money market instruments with low to medium risk profile. On the flipside, it would allocate up to 30% of assets in equity and equity related securities with medium to high risk profile. The fund's performance will be benchmarked against Crisil MIP Blended Index. Debt portion of the fund will be managed by Rahul Goswami and equity portion will be managed by Rajat Chandak. The investments of the fund in ADR/GDR and other foreign securities are being handled by Atul Patel.

Union KBC Capital Protection Oriented Fund – Series 2 (G)

Opens: January 21, 2013

Closes: February 4, 2013

Union KBC Capital Protection Oriented Fund –Series 2 G is a new close-ended fund with a maturity period of 36 months from the respective date of allotment. The investment objective of the fund is to seek capital protection on maturity by investing in fixed income securities maturing on or before the tenure of the fund and seeking capital appreciation by investing in equity and equity related instruments. Hence, the fund will allocate 83 to 100% of assets in debt and money market instruments and 0 to 17% in equity and equity related instruments. The performance of the fund will be benchmarked against Crisil MIP Blended Fund Index and Mr. Ashish Ranawade will be the fund manager. 

IIFL Sensex Fund, SBI RGESS Tax Saving Fund, DWS Dynamic Bond Fund, Axis Asian Asset Income Fund, Franklin Templeton India Feeder – Asian LatAM Fund, Union KBC Short Term Debt Fund, Reliance US Equity Opportunity Fund, Reliance Close Ended Equity Fund, IDBI Rajiv Gandhi Equity Saving Scheme – Series I, HSBC Russia Equity Fund, Pramerica Midcap Opportunities Fund, BNP Paribas Capital Protection Oriented Fund Series I, II, and III, BNP Paribas Government Securities Fund, Pramerica Income Fund, IIFL Short term Income Fund, LIC Nomura RGESS Fund, and Motilal Oswal MOSt 20 Plus GILT Fund are expected to be launched in the coming months.

GEMGAZE

January 2013

Balanced Funds – just the right mix

Are you one of those, whose heartbeat quickens or slows down according to market movement but who still wants to add the zest of equity returns to your portfolio? Then Balanced Funds are a perfect match for your portfolio as the funds offer the best of both the worlds. Their mandate allows them to invest in equities, which acts as a catalyst for the fund’s performance. The remaining can be allocated to debt and others, which offers a safety net, thereby, providing a right mix of aggression and defence in one fund. 

All the GEMs that withstood the rough weather of 2011 have gracefully retained the status of a GEM in 2012 too, thanks to their consistency and stability, not to mention the facelift of the equity markets.

HDFC Prudence Fund Gem

Outshines competition

HDFC Prudence Fund is one of the oldest and largest funds with an asset base of Rs 6239 crore and is spearheaded by one of the mutual fund industry’s renowned fund managers, Prashant Jain, since its inception in January 1994. Since he is associated with this fund from day one, it brings a lot of stability and consistency in the fund’s performance and portfolio management. The fund has given 21.57% annualised returns since inception. It has also managed to beat many of the only-equity funds in the long run and has provided the best risk-adjusted returns in the balanced fund category. HDFC Prudence Fund truly outshines the pack and is known for its ability to trounce the competition. Over the past 10 years, it has emerged as the best performer with an annualised return of 26% (category average: 18%) and has grabbed the first and second spot six times in annual returns. Such impressive statistics are backed by sound portfolio calls and astute stock selection. The fund earned a return of 29.17% in the past one year as against a category average return of 26.28%. The fund is highly diversified both in terms of sectors and stocks. It holds 123 stocks in its portfolio and the top three sectors finance, healthcare, and energy account for 35.1% of the portfolio. Less redemption pressure lends stability to its assets under management. This has allowed it to adopt a buy and hold strategy. On the debt side, it bet on corporate debentures and government securities rather than short-term instruments. In its debt portfolio too, the fund does not churn instruments too much, suggesting that it is looking at interest payouts (called accruals) from the instruments it holds. The portfolio turnover ratio is 31.49% and the expense ratio of the fund is 1.79%. However, the fund manager has astutely managed the equity portfolio wherein the market-cap allocation was equally divided among the large and mid-cap stocks to manage risk and returns. Thus looking at all these attributes, the fund seems a good bet even for conservative investors, who should take exposure to this fund through SIP.

Sundaram Balanced Fund Gem

Safe bet

Sundaram Balanced Fund has earned a return of 22.89% over the past one year as against the category average of 26.28%. The three-year and five-year returns are also a tad less than the category average of 7.39% and 2.69% respectively at 3.47% and 1.76%. The fund has 68% of its portfolio invested in equity, and the large-cap orientation of the fund with nearly 75% has enabled it to impart the much-needed safety to the portfolio in the midst of a volatile market. The debt component of Sundaram Balanced Fund comprises mainly of bonds and debentures. The equity component of the portfolio comprises of 35 stocks. This Rs 62 crore fund has 48% of the portfolio in the top three sectors, financial services, energy, and technology. The expense ratio of the fund is 2.5% while the portfolio turnover ratio is 18%.

DSPBR Balanced Fund Gem

Long-term diversifier

DSPBR Balanced Fund tends to spread its risk quite thin, given that there are 68 stocks in the portfolio across market cycles. Even the top 10-20 stocks have less than 4% exposure each. This apart, exposure even to individual sectors is not heavy either. No sector accounts for more than 10% of the portfolio, save the finance sector. DSPBR Balanced has a fairly high quality debt exposure, with the fund restricting its exposure to AAA and AA+ rated instruments. The top three sectors of this Rs 645 crore fund are financial services, energy, and services, contributing 36% to the portfolio. 74% of the fund’s portfolio is in equity and 24% in debt. 47% of the assets are in large caps. The one-year return of the fund is 25.85%, almost on par with the category average of 26.28%. The expense ratio is 2.2% and the portfolio turnover ratio is a massive 219%. But given its strong track record of over 12 years, during which it has bettered the returns of even standard indices such the Nifty, the fund may be suitable for an investor's long-term portfolio as a diversifier.

Reliance Regular Savings Balanced Fund Gem

Aggressive but mature

Aggressive equity bets combined with maturity has resulted in its consistent performance. The fund tends to take higher exposure to select stocks. The flexibility to change its investment character during bull runs with aggressive concentrated equity bets and shift to defensive and diversified equity holdings during bear phases makes this fund a compelling bet. The one-year return of this Rs 556 crore fund is 33.79% as against the category average of 26.28%. Returns of 10.10% and 8.54%, respectively, as against the category average of 7.39% and 2.69% during a three- and five-year period, reflects the fund's ability in stock selection. The fund has also outpaced its benchmark BSE 100 by six percentage points. The fund has invested 74% in equity and 22% in debt. Being a multi-cap fund, it has traditionally taken bets on mid- and small-cap stocks, to prop up returns. While such a strategy yielded returns in a bull phase, it has equally dragged performance during volatile markets. But in recent times, the fund has toned down its exposure to mid- and small-cap stocks and is now overweight on large-cap stocks at 59%. 42% of the portfolio is in the top three sectors, finance, healthcare, and technology. The fund has a very compact portfolio, and has in recent times been more aggressive in churning its portfolio with a portfolio turnover ratio of 113%. The expense ratio is 2.19%. The fund is managed by Mr Omprakash Kuckian.

Canara Robeco Balanced Fund Gem

Strong Contender

Canara Robeco Balanced Fund has had a tumultuous history, but is a strong contender with a good stock picking record. The fund has become much more diversified over time with stocks hovering around 50 - a radical change from allocation to a single stock touching 20% and commonly crossing 10%. What has become evident over the past few years is its ability to contain the downside. Last year, despite a fund manager change, the fund delivered quarterly returns ahead of the category during market run-ups and fell less when the reverse took place. Its strategy is to limit risks in equities by focussing on large-cap stocks. The fund's active strategy in debt, which accounts for a third of assets, has been the key to managing volatility in the last three volatile years. The one-year return of the fund is 26.81% as against the category average of 26.28%. 59% of the portfolio is in large caps with 37% of the portfolio in the top three sectors concentrated in finance, FMCG, and technology sectors. The expense ratio of this Rs 203 crore fund is 1.66% with a very high portfolio turnover ratio of 160%.

FUND FLAVOUR

January 2013

 

Traditionally, Indians are great savers but are very conservative and rather reluctant investors too. As per the data released by the Reserve Bank of India (RBI), about 47% of the household savings in India lay in deposits with banks. Contribution of equity assets, in the total financial assets of the household sector is very low - about 12%, which is much lower when compared against the global standards (especially the developed markets). The primary reason for this is, the element of uncertainty involved in equity, which makes many investors uncomfortable and stay away from it. The mighty bull phase of 2002-08, however, had changed the perception of many investors towards investing in equity assets. But only a few early movers, who invested at the onset of the bull market, reaped the benefits. Having witnessed their success, others too started looking upon equity asset class as a hot cake. Unfortunately, some entered during the fag end of a multi-year bull phase and they felt the blow when the negative ripples of the U.S. sub-prime mortgage crisis had adverse repercussions on the Indian equity market. At present, although markets have recovered from the slump, they have generated no real returns for many investors over the last five years. Memories of the bear market are yet to fade from the minds of investors. Having burnt their fingers, retail participation in equity markets, not to mention equity mutual funds, recently fell to a seven year low.

Start off on a good note…

If you are one of those who have not yet invested in equity mutual funds, although risk profile allows you to invest, fearing the topsy-turvy rides of equity markets, then you ought to rethink to obtain effective real returns over the long-term. While your proclivity to be invested only in fixed income investment avenues may help you safeguard against the implied volatility of equity markets, you may not be able to generate the desired wealth over the long-term by secluding equities. If you find yourself confused in choosing between safety and returns then you could find solace in "balanced funds". 

The buzz was "balance" in 2012, and the term as it applies to mutual funds is just as it sounds, holding both stock and bond positions in one convenient wrapper. The theory is reduced volatility, and the attendant reduced return, but investors do not mind too much if it smoothes out the ride. Today we are facing considerable headwinds on the global and domestic front. High interest rates, geopolitical tensions, fears of a resurgence of inflation are some of the red flags and balanced funds could be a relatively safer haven for new entrants into the stock market.

What exactly is a Balanced Fund? 

Balanced Fund is a category of mutual funds which invests both in fixed income instruments as well as equities in different proportions. Allocation to debt and equity depends on factors such as the outlook for equities, valuations, inflationary pressure, and interest rate scenario among others. But generally, in order to qualify as equity oriented funds (which make their tax treatment favourable), balanced funds allocate 65% of their total assets towards equity and 35% towards debt. 

Facts in favour…

The first benefit which balanced funds offer is a set asset allocation - generally ranging between 65% and 75% in equity and the rest in debt and cash. However, extraordinary market conditions would not deter the fund manager to go beyond these limits or reduce the exposure to a particular asset class. 

In addition, balanced funds provide the benefit of diversification within each asset classes i.e. equity and debt. So, within equity you benefit from wide diversification across stocks and sectors, while in debt, across fixed instruments and maturity of papers. Moreover, the hybrid nature of the product allows the fund manager of a balanced fund to increase exposure towards debt investments when outlook appears favourable to do the same, thereby, facilitating in mitigating the risk (associated with equities) and rewarding investors with appealing returns. More often than not, balanced funds are more conservative in their approach than a plain vanilla equity fund which runs with a sole objective of profit maximisation. A balanced fund, as the name suggests, tries to strike a balance between risk and returns by taking optimum exposure to debt as well as equity and they are less risky and volatile than pure equity funds. This conservative approach helps balanced funds deliver steady returns to investors across market cycles. This may, to an extent, boil down your concerns about investing in mutual funds. 

 

Balanced funds can also be the ideal vehicle to help meet critical financial goals. Given the stability offered by these schemes, you can invest in them to fund short- to medium-term goals without worrying about market risk. Running a SIP in these schemes will enable you to safely build a sizeable corpus over three to five years and meet your financial targets.

In terms of taxation, the balanced funds that invest at least 65% in equity are treated at par with equity investments and attract no tax liability on capital gains if held for more than a year. The debt-oriented funds come under the debt fund category, where capital gains are taxable. This means that even the equity portion of the fund gets taxed. However, these are eligible for indexation benefits (capital gains adjusted for inflated cost of purchase), attracting a lower taxation (10% without indexation, 20% with it) if held for more than a year.

On the flip side…

Fund managers have limited freedom as 65% in equity is the minimum requirement to take benefits of taxation. So even if the fund manager feels that minimum equity exposure is beneficial for the portfolio he cannot do it.

Partial withdrawal is a big problem with balanced funds – think of a situation when you need some amount for your emergency need but you have parked your whole amount in balanced funds. As you do not have any choice you will redeem from balanced funds and that means, for every redemption of Rs 100 you are actually redeeming Rs 65 from equity and Rs 35 from debt. Even if you are long term investor in equity, automatically your equity gets redeemed. In case of proper asset allocation, you could have avoided this.

You have limited choices. If you want to have exposure to midcaps or only large caps, this is not possible with balanced funds as you cannot dictate your terms to fund managers.

How have they fared? 

Balanced funds as a category have generated decent returns across time periods. Although they have not outperformed the category of pure equity funds or broader market indices in absolute terms, they have not trailed by a big margin either. On the contrary, they have been a lot more stable (in terms of the risk as revealed by the Standard Deviation of 3.88%) than the pure equity funds (standard Deviation of 5.16%). Thus the risk-adjusted returns too have been superior in case of balanced funds, and they have also managed to outperform some of the key indices. Balanced funds have delivered superior risk-adjusted returns, outperforming pure equity funds over three- and five-year time frames. Balanced funds typically outperform the markets during downturns, but that they lag behind during rallies. It underscores the fact that you need to be invested in a balanced fund for a long period of time in order to benefit from its asset rebalancing structure.

Best of both worlds

 

When you invest in an equity fund, your equity risk is diversified. This is because numerous investors like you invest in the same fund. When the investment call is taken by the appointed fund manager he uses his market knowledge to select and invests only in cherry picked equity stocks. The principal objective of a debt fund is preservation of capital followed by generation of income on the capital invested by you. Now if you want to get the best of both worlds, you may choose the third option of mutual funds i.e. balanced funds. These are built out of a combination of both worlds, viz., equity world as well as debt world. Both are generally combined in the ratio of 65:35, where 65% is allotted to equity portfolio (shares) and remaining is debt (fixed return investments like bonds). Conventionally, certified financial planners have usually suggested that first-time investors use balanced funds as their preferred vehicle. Such funds, which straddle the equity as well as debt space, are viewed as a compromise solution suitable to those who are gingerly approaching the stock market. They are in particular a good starting point for novice investors because they tend to be a lot more consistent during the bearish market phases but still generate decent returns in market upswings. However, not all balanced funds are similar in performance. As mentioned earlier, very few manage to beat broader equity markets or give satisfactory performance in bull market cycles. This entails that you have to be careful while choosing a fund for investments, because as an investor you may not be satisfied only with your fund falling by lesser margin. You would want your fund to generate decent, positive returns during the market upswings. Assessment of available options would make your journey smoother.

 …to end on a good note!

 

The stock market has delivered single-digit returns in the past five years. The BSE Sensex has given 2.74% annualised returns amidst bouts of volatility. But what if you had mixed some bonds (or fixed income instruments in market parlance) with your equity investments? Well, you have fared a little better. According to Morningstar India, a mutual fund tracking entity, balanced funds as a category delivered annualised return of 5.02% in the five-year ended December 31, 2011, leaving behind large-cap equity funds (3.16%) and small- & mid-cap equity funds' category (2.97%). Those capable of stomaching the volatility prevalent in the market can still look at equity funds, though the performance of equity funds may remain clouded in the near term. But balanced funds offer a judicious mix of debt and equity. As equities are attractively valued with limited downside and interest rates almost peaking, you can now expect healthy risk-adjusted returns from balanced funds.