FUND FLAVOUR

January 2015

Balance your portfolio with balanced funds

The task of investment planning is rather complex in today's arena. With a host of investment products available in each asset class - equity, debt and gold, the task gets all the more convoluted. Very often, many investors either in haste, confusion, or sheer exuberance created by brokers or agents invest in all these asset classes in a haphazard way, thus defying the objective of effective investment planning. The sheer exuberance created by glamorous business channels often sway you away from the core essence of allocation. Remember it is the hard earned savings that you invest, and hence it is imperative that you deploy your savings systematically in a disciplined manner. It is vital that you consider factors like age, income, expenses, nearness to goal, risk appetite, etc. which can facilitate prudent investment planning and asset allocation. This can be a daunting task as numerous exhaustive calculations need to be performed (for effective investment planning and asset allocation). But you have a way out as you can invest in a balanced fund that provides you several advantages along with the ultimate objective of wealth creation.

Balanced funds – a good way to start your mutual fund investments

If you are one of those who have not yet invested in equity mutual funds, although your risk profile allows you to invest, 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 "balanced funds" category in mutual funds, entails in them this benefit by providing you an effective asset allocation, while you are invested in a single avenue of investment, and offers you the following advantages:

• Shift across two asset classes depending upon the investment opportunities in the market
• Hedges your portfolio when one respective asset class experiences turbulence
  
  
• Enforces discipline by maintaining a pre-determined asset allocation (generally 65% in equity and the remaining 35% in debt, thus maintaining an equity orientation for tax status which other equity funds enjoy)
• In addition, balanced funds provide the benefit of diversification within each asset classes, i.e. equity and debt. 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. This may, to an extent, boil down your concerns about investing in mutual funds managed by professional fund managers who have rich experience in research and analysis along with fund management.

Do balanced funds hold promise?

Balanced funds, which invest in a mix of debt and equity, are getting increasingly popular among investors. The assets under management in balanced funds have increased 64% from Rs. 13,376 crore in April 2014 to Rs. 21,940 crore in November 2014. This increase can be partly attributed to mark to market (MTM) gains. The BSE Sensex has run up 28% from April 2014 to November 2014. Apart from MTM gain, the category has also seen net inflows of Rs. 4,477 crore during the same period, according to SEBI data. The renewed interest in balanced funds is evident from the increasing folio count. Balanced fund folios have increased by 67,637 in the April-November period in 2014. The total number of folios has swelled from 17.96 lakh in April 2014 to 18.64 lakh in November 2014, according to SEBI data. After the changes in taxation structure of debt funds and increase in the tenure of holding period to 36 months to avail long term capital gains tax, financial advisors are increasingly recommending balanced funds to investors for a variety of reasons. But it is not advisable to shift to balanced funds solely for tax gains. Though not strictly comparable to debt funds, balanced funds offer investors the best of both worlds without having to remain invested for three years to avail long term capital gains tax. Balanced funds typically invest 65% of their corpus in equities and are thus treated as equity funds for the purpose of taxation. In equity funds, long term capital gains are tax free in the hands of investors. Thus, balanced funds are more tax efficient.

However, they come with their own risks as 65% assets are invested in equity. Moreover, the returns can be highly skewed if equity markets do not perform well. Balanced funds are a safe bet especially at a time when markets have run up so much. The returns of balanced funds are largely dependent on markets but when the market falls these funds can protect investors because of the debt exposure.

Value Research data shows that balanced funds have delivered 45% absolute return over a one year period. For instance, some of the oldest funds in the industry like Canara Robeco Balance Fund, HDFC Prudence Fund, Birla Sun Life 95 Fund, and UTI Balanced Fund have generated CAGR of 13%, 21%, 23% and 17% respectively. 

Get the balancing act right

Balanced funds have always been recommended to novices in the stock market. These funds invest in a mix of equity and debt and allows the fund manager to jiggle the portfolio and contain the turbulence in both equity and debt market. The basic idea is that investors will be able to take exposure to equity without fearing a total loss of capital. This can also be a product for maiden investors to start off with, owing to lower volatility and tax benefits. Being an evergreen product that works across market cycles, and offering the benefits of asset allocation, this product could form part of your core portfolio.

In a nutshell…

Balanced funds are an ideal investment fund if you are not ready to assume very high risk, but want to participate in the equity markets to add a zing to your return on investments. Therefore, if you want your portfolio to deliver a stable performance over the long term, and also have a mix of equity and debt to follow an asset allocation of say 70:30 (70% into equity and 30% into debt) or say 65:35 (65% into equity and 35% into debt), you should consider allocating some portion of your investible amount to balanced funds in addition to diversified equity funds. Have a healthy mix of different types of funds in your portfolio. For instance, debt provides paltry returns while the so called multi-bagger (mid cap) funds offer excellent returns. While debt at least protects your capital, the mid cap fund can hurt your capital too. In the case of equity, try to stick to the regular run-of-the-mill blue chip fund or index fund which should do the trick. In the case of debt funds you can pick up a debt fund with good ratings or stick to a bank fixed deposit. Maintaining a simple portfolio with balanced funds, diversified equity funds, and debt funds is far better than having dozen different items of which half are risky. One must not avoid equity or risky assets altogether, but at the same time going overboard on equities can be foolish too. Remember that investing with a balanced view is as important as sticking to a balanced diet.