FUND FULCRUM (contd.)

January 2018

Regulatory Rigmarole

NSE NMF II has introduced e-mandate facility on its mutual fund platform with immediate effect. The e-mandate facility would help mutual fund distributors to reduce the SIP registration cycle to just two to three days, as compared to two to three weeks earlier. Currently, MF distributors register paper based mandates for their investors, which is time consuming as it involves obtaining signature of an investor on the form and submission of physical form at the service centres for processing. The objective is to offer simple and hassle-free alternative to the MF distributors in the form of e-mandate wherein they  can register mandate of an investor online, which will be digitally signed based on Aadhaar based OTP validation. As per UIDAI website, there are approximately 119 crore Aadhaar numbers, which holds a huge potential for mutual fund industry which currently has 6.2 crore folios only. NSE has implemented e-mandates through HSBC (sponsor bank for the initiative) along with E-Mudhra (Certifying Authority licensed by Controller of Certifying Authorities, under Government of India) as an E-sign service provider. Digital platforms will be the game changers for Indian mutual fund industry.

Key features of this facility:

• e-mandate is available for individuals with single mode of holding

• Currently, maximum limit for e-mandate is Rs.1 lakh

• e-mandate is an Aadhaar based functionality, accordingly, registration of mobile number with UIDAI is mandatory for e-signing of mandate

• Updation of Aadhar number in bank account on which mandate is being registered is mandatory for mandate registration

• e-mandate can be registered for the banks enabled by NPCI for the same 

• At present 28 banks are participating for e-mandate service through NPCI

SEBI has reportedly asked a few fund houses to give details of breakup of their total expense ratio (TER). This is in the wake of alleged violation of AMFI’s best practices circular on commission structure of distributors.  In 2015, AMFI had issued its best practices circular to AMCs in which it had asked fund houses to discontinue ‘up fronting’ of trail across all schemes. In addition, it had put a cap of 1% on upfront commission and given freedom to fund houses to decide trail commission. However, it has to be within the distributable TER. Distributable TER is gross TER minus operating expense. A few AMCs pay as much as 2% as trail commission to their distributors. The market regulator wants fund houses to rationalise commission structure of distributors and management fee of AMCs. If TER comes down, naturally, fund houses cannot pay the commission they are paying today. IFAs cannot expect to increase their revenues through higher commissions.

In a move that will give distributors and investors a more complete picture of fund performance vis-a-vis its benchmark, SEBI has instructed fund officials to benchmark their schemes against Total Return Index (TRI), a benchmark that captures dividend income. Unlike traditional benchmarks, which do not take into account dividend income, TRI includes interest, capital gains, dividends and distributions realized over a given period of time. Simply put, TRI takes into account the dividends from companies, which is reinvested. Hence, TRI provides an apt measure to reflect the true alpha created by mutual funds. So far, two fund houses – Quantum Mutual Fund and DSP BlackRock Mutual Fund disclose performance of all active equity funds with the TRI. The NAV of a scheme includes income from dividends; however, the index, which the schemes follow to measure its performance do not capture gain from dividends. For instance, if the scheme gets 2% dividend over a year and it has outperformed its benchmark by 2.50%, then the extent of alpha generation is only 50 basis points and not 2%. In a circular, SEBI said, “At present, most of the mutual fund schemes (other than debt schemes) are benchmarked to the Price Return variant of an Index (PRI). PRI only captures capital gains of the index constituents. On the other hand, Total Return variant of an Index (TRI) takes into account all dividends/ interest payments that are generated from the basket of constituents that make up the index in addition to the capital gains. Hence, TRI is more appropriate as a benchmark to compare the performance of mutual fund schemes.” SEBI further said that fund houses could continue to use CAGR of TRI to compare the performance of the scheme with the benchmark. However, since the historical data of TRI may not be available, fund houses can use CAGR of PRI until the date from which TRI is available, according to SEBI. Value Research data shows that large cap schemes have outperformed Nifty 50 by 2.2% and 2.7% in three and five years respectively. Currently, the dividend yield of Nifty is at 1.25%, which shows that the large cap schemes have outperformed their benchmark by 1% and 1.5% over three and five years respectively. This circular will come into effect from February 1, 2018.

To avoid the potential conflict of interest, market regulator SEBI is considering imposing a 10% cross-shareholding cap in mutual funds. The new measure may have an impact on the shareholding pattern of UTI Asset Management Company (AMC). State Bank of India (SBI), Punjab National Bank (PNB), Bank of Baroda (BoB) and Life Insurance Corporation (LIC) are having their own mutual funds and at the same time they hold 18.24% stake each in UTI AMC. Under the proposal, any shareholder owning at least 10% stake in an AMC will not be allowed to have a 10% or more stake in another mutual fund house operating in the country. Further, a sponsor of a mutual fund, its associates, group companies and their asset management company will be restricted from holding a stake of 10% or more in a rival AMC. In addition, such entities will be barred from having a representation on the board of another mutual fund house. The new norms are aimed at avoiding any conflict of interest and help in strengthening the governance structure for mutual funds.

SEBI may come out with a new framework for Investment Advisor in order to segregate advisory and the role of a distributor. To prevent the conflict of interest that exists between 'advising' of investment products and 'selling' of investment products by the same entity/person, there should be clear segregation between these two activities. Existing registered investment advisers who are offering distribution services through a separate division would be given an option to choose between providing investment advice and distribution service before March 31, 2019. From April 1, 2019, any person, including their immediate relatives or holding or subsidiary or associate entity shall offer either investment advice or distribution services. SEBI Board has approved the consultation paper to seek public comments on following proposals:

i) There should be clear segregation between the two activities of the entity i.e. providing investment advice and distribution of the investment products/execution of investment transactions.

ii) Mutual Fund Distributors (MFDs), while distributing their mutual fund products can explain the features of products to client, and shall ensure the principle of ‘appropriateness’ of products to the client.”

iii)  Distributors cannot provide financial planning services such as risk profiling, financial goal setting, to their clients.

iv) Distributors will have to disclose the commission they earn.

In its budget proposals, AMFI has requested the Union Finance Minister Arun Jaitley to introduce Debt Linked Savings Scheme (DLSS) to channelize long term savings of retail investors into corporate bond market through mutual funds. “To deepen the Indian bond market and strengthen the efforts taken by RBI and SEBI for increasing penetration in the corporate bond markets, it is expedient to channelize long-term savings of retail segment into corporate bond market through mutual funds on the same lines as ELSS,” according to AMFI. Like ELSS, AMFI wants DLSS investors to avail benefits of tax deduction under Section 80C on investments of up to Rs.1.50 lakh. However, AMFI has recommended that DLSS should have lock-in of 5 years. If implemented, this will also bring debt oriented mutual funds  on  par  with  tax  saving bank  fixed deposits,  where  deduction  is  available under Section 80C. Further, it is proposed that DLSS should invest at least 80% of its corpus in the bonds issued by the listed companies as permitted under SEBI Mutual Fund Regulations. Further, the scheme is to be allowed to put another 20% of its corpus in short term money market instruments. In the proposal, AMFI said that the introduction of DLSS would help small investors participate in bond markets at low costs and at a lower risk as compared to equity markets. Earlier in 1992, the government had notified the ELSS to encourage investments in equity funds. Over the years, ELSS has been an attractive investment option for retail investors. Over the years, several committees such as the R.H. Patil committee (2005), Percy Mistry committee (2007) and Raghuram Rajan committee (2009) have studied various aspects related to bond market and have made recommendations to the government to strengthen corporate bond market through effective retail participation.

In India, mutual fund investment is equal to 4% of GDP as against 60% of GDP in the USA. It is not very surprising that the mutual fund penetration in our country is low but it is definitely increasing. Assets have been historically concentrated towards physical assets like real estate and gold. However, this is set to change with demonetisation and awareness campaigns.

FUND FULCRUM

January 2018

The year 2017 ended on a positive note for the mutual fund industry as the total equity AUM including pure equity funds, balanced funds, ELSS and equity ETFs for December 2017 touched an all-time high of Rs.10.08 lakh crore. This is largely due to increased inflows in equity funds and mark to market gains. While the industry received inflows of Rs.24,239 crore in December 2017, the BSE Sensex and Nifty 50 reached new highs last month. Among equity funds category, pure equity funds received net inflows of Rs.14,921 crore. As a result, the assets under equity funds increased by Rs.33,884 crore to Rs.6.90 lakh crore in December 2017. However, compared to previous month, the inflows into equity funds have declined. Many investors have redeemed their money when the markets touched new highs. In addition, many investors rebalanced their portfolio at the end of year to align with their asset allocation. The mutual fund industry has been receiving substantial equity inflows through SIPs and STPs. Balanced funds continue to attract money from investors as they mopped up net inflows of Rs.9,756 crore in December 2017, up 28% compared to the previous month. Overall, the AUM of the MF industry declined to Rs.21.37 lakh crore in December 2017 from Rs.22.79 lakh crore. The AUM fell by 6.2% or Rs.1.41 lakh crore due to the net outflows in debt funds. Corporates and institutions generally redeem their investments at the end of a quarter from debt funds to pay advance tax.

Equity funds remain the preferred way for retail investors to invest in the markets. The latest SEBI data shows that equity funds including pure equity, ELSS, balanced and equity ETFs added close to 15.4 lakh folios in December 2017. The total folio count of equity funds went up to 5.53 crore in December 2017 from 5.38 crore in November 2017. Experts attribute this addition of folios to optimism prevailing in the market and investor awareness initiatives. In absolute terms, pure equity funds witnessed the highest increase in folios. Over 12 lakh folios were added in equity funds taking the total number of pure equity fund folios to 3.98 crore. Balanced funds followed pure equity funds. Balanced funds added close to 2 lakh folios. Balanced fund folios increased from 51 lakh in November 2017 to 53 lakh in December 2017. Equity ETF was the only equity category to witness a fall in folios. Equity ETF folios decreased by nearly 1 lakh to 7.6 lakh folios in December 2017. Barring gilt funds, gold ETFs and fund of funds investing overseas, all other categories recorded a growth in folios. Overall, the industry has added over 15.65 lakh folios in December 2017. The total folio count across all categories increased from 6.49 crore in November 2017 to 6.65 crore in December 2017. The industry has been running a very ambitious investor awareness campaign, 'mutual funds sahi hai' (mutual funds are right) and this may have added considerably to the growth. Over the last few years, mutual funds have proved to be a low-cost and transparent way to channelise savings towards financial investments.

SIP investors focus on financial goals and stay put for long term. This is borne by AMFI data that shows that 57% of the total SIP accounts are active for more than five years. Of the 1.88 crore SIP accounts as on December 2017, 1.06 crore or 57% SIPs are active for over five years. The total AUM of SIP accounts active for over five years was Rs.41,067 crore. Many investors who have seen at least one market cycle, realized the significance of investing in mutual funds through SIP. These investors stay put for long term and understand rupee cost averaging. In future, we will see large number of retail investors invest in mutual funds for long term through SIPs. Since many distributors ask their clients to link their investment with the financial goals, many investors have been opting for perpetual SIPs. AMFI data also shows that the industry mopped up close to Rs.47,000 crore in April-December through SIPs. In addition, the mutual fund industry has added 9.26 lakh SIP accounts each month on an average during the first nine months of FY 2017-18, with an average SIP ticket size of Rs.3,300. In fact, the total AUM of SIP stood at Rs.2.02 lakh crore as on December, i.e. 9.5% of the overall AUM of the mutual fund industry. Most of these SIPs have come through distributors. AMFI data shows that regular plans constituted 1.7 crore SIP accounts while 17.20 lakh SIPs were in direct plans. The AUM of SIPs under regular plan is Rs.1.85 lakh crore whereas the AUM of SIPs through direct plans stood at Rs.17,000 crore.

Piquant Parade

Italy based UniCredit Financial Services, the foreign partner of Baroda Pioneer Mutual Fund, is the latest foreign fund house to exit the Indian mutual fund industry. UniCredit holds 51% stake in the Baroda Pioneer Mutual Fund joint venture. State run Bank of Baroda, which holds the 49% stake in the fund house, announced that it will buy out 51% stake from Unicredit. The transaction is subject to regulatory approval in India. The move comes on the back of acquisition of Pioneer Investments by Amundi earlier this year. Amundi already has a presence in India as it owns stake in SBI Mutual Fund. Baroda Pioneer has built an AUM of Rs. 11,000 crore as on September 2017. There has been a spate of exits by foreign fund houses, with five foreign AMCs – KBC, Morgan Stanley, ING, PineBridge and Deutsche exiting India.

To be continued…

NFONEST

January 2018

Fundraising by new offers in the equity segment of the mutual fund industry hit a 10-year high of Rs 22,333 crore in 2017. The average fund raised per new fund offer, at nearly Rs 380 crore, was also the highest since 2008. Equity NFOs’ contribution to overall equity mutual fund sales is on the rise. Interestingly, of the total inflows in the equity segment during 2017, NFOs contributed 14.7% — a significant jump from 4.6% seen in 2016. This essentially means that flows through NFOs are gaining momentum and there is an available market for the success of such products — which were almost on the brink of extinction in 2011-12. Last year saw a strong comeback by equity NFOs. Though in absolute terms, their numbers were lesser at 59 compared with what was seen in 2014 at 75, the quantum of money was high, which led to a substantial funds flow through this route. 

NFOs of various hues adorn the January 2018 NFONEST.

Mahindra Unnati Emerging Business Yojana Midcap Fund

Opens: January 8, 2018

Closes: January 22, 2018

Mahindra Mutual Fund has launched the Mahindra Unnati Business Yojana Midcap Fund. 65% of the investment will be made in mid-cap emerging companies and the remaining 35% into a mix of large-cap and small-cap emerging companies. The fund is benchmarked against the S&P BSE Midcap Index. The fund manager is Mr.Ratish Varier.

DSP Blackrock Arbitrage Fund

Opens: January 15, 2018

Closes: January 22, 2018

DSP Blackrock Mutual Fund has launched the DSP Blackrock Arbitrage Fund. The investment objective of the scheme is to generate income through arbitrage opportunities between cash and derivative market and arbitrage opportunities within the derivative market. Investments may also be made in debt and money market instruments. The fund is benchmarked against the CRISIL Liquid Fund Index. The fund manager is Mr. Mayur Patel.

SBI Dual Advantage Fund – Series XXVI

Opens: January 10, 2018

Closes: January 24, 2018

SBI Dual Advantage Fund is a close ended hybrid scheme. The primary investment objective of the scheme is to generate income by investing in a portfolio of fixed income securities maturing on or before the maturity of the scheme. The secondary objective is to generate capital appreciation by investing a portion of the scheme corpus in equity and equity related instruments. The product is suitable for investors who are seeking income and capital appreciation by investing primarily in debt and money market instruments for regular returns and equity and equity related instruments for capital appreciation. The fund is benchmarked against the CRISIL MIP Blended Fund Index. The fund managers are Mr. Rajeev Radhakrishnan and Mr. Ruchit Mehta.

SBI Long Term Advantage Fund – Series 5

Opens: December 21, 2017

Closes: March 20, 2018

SBI Mutual Fund has launched the SBI Long Term Advantage Fund – Series 5. The investment objective of the scheme is to generate capital appreciation over a period of ten years by investing predominantly in equity and equity-related instruments of companies along with income tax benefit. The fund is benchmarked against the S&P BSE 500 Index. The Fund Manager is Mr. R. Srinivasan.

UTI Long Term Advantage Fund – Series VII

Opens: December 21, 2017

Closes: March 21, 2018

UTI Mutual Fund has launched a new fund named as UTI Long Term Advantage Fund - Series VII, a 10 year close-ended equity linked savings scheme. The investment objective of the scheme is to generate capital appreciation over a period of ten years by investing predominantly in equity and equity related instruments of companies along with income tax benefit. The performance of the scheme will be benchmarked against the S&P BSE 200 Index. The scheme will be managed by Mr. Sachin Trivedi.

ICICI Prudential Long Term Wealth Enhancement Fund

Opens: December 22, 2017

Closes: March 21, 2018

ICICI Prudential Mutual Fund has launched the ICICI Prudential Long Term Wealth Enhancement Fund. The scheme is a three year close ended equity linked savings scheme that seeks generate long-term capital appreciation to unit-holders from a portfolio that is invested predominantly in equity and equity related securities of large capitalization companies and emerging mid cap companies along with income tax benefit. This product is suitable for investors who are seeking long term wealth creation. The fund is benchmarked against the Nifty Large Midcap 250 Index. The Fund Managers are Mr. Sankaran Naren and Mr. Rajat Chandak.

Sundaram Long Term Advantage Fund – Series III

Opens: December 27, 2017

Closes: March 27, 2018

Sundaram Mutual Fund has launched an ELSS fund, Sundaram Long Term Advantage Fund – Series III. The investment objective is to generate capital appreciation over a period of ten years by investing predominantly in equity and equity-related instruments of companies along with income tax benefit. The fund is benchmarked against the S&P BSE 500. The Fund Manager is Mr. S. Krishna Kumar.

UTI Nifty Next 50 Index Fund, Sundaram Value Fund Series IX & XII, ICICI Prudential Mutual Fund – ICICI Prudential S&P BSE 500 ETF and Sundaram Emerging Small Cap Series 1I to IV are expected to be launched in the coming months.

GEMGAZE

January 2018 

Proper asset allocation and regular rebalancing are two of the most important requirements in investing. Balanced funds provide an avenue to achieve both. Balanced funds are suitable for investors who want to enjoy the returns from equity investments but with a safety cushion. Normally this is true for first time investors or investors who have low to moderate risk appetite. Since balanced funds are a mix of equity and debt, they have lower volatility than the equity funds and their returns are higher than the debt funds. Though in a bull market these funds will not give you as much return as pure equity funds, the loss would be lower than those funds in a downward moving market.

All the GEMs from the 2017 GEMGAZE have performed reasonably well through thick and thin and figure prominently in the 2018 GEMGAZE too. 

HDFC Prudence Fund Gem

HDFC Prudence Fund is the largest fund in the category with assets amounting to Rs 36,395 crore. The fund, managed by Prashant Jain, widely regarded as one of the most competent money managers, has delivered an annualised return of 19.47% since its inception. HDFC Prudence, with its long-standing stellar track record of delivering 12.23% compounded annually over the last 10 years, towers over the category average of 8.79% annually over the same period. Over a three- and five-year period horizon, the fund returned an annualised 16.53% and 11.90%, respectively as against the category average returns of 16.13% and 11.42%, respectively, over the same period. The fund earned a return of 26.01% in the past one year as against the category average of 22.77%. HDFC Prudence Fund has a diversified quality portfolio with a blend of growth and value. The allocation to a single stock has been capped at around 7%, with the highest currently allocated to State Bank of India. There are 91 stocks in the portfolio and the top three sectors are finance, energy, and construction, which constitute 43.78% of the portfolio. The portfolio turnover is 61% and it has an expense ratio of 2.26%. The fund is benchmarked against CRISIL Balanced Fund Aggressive.

ICICI Prudential Balanced Fund Gem

Launched in 1999, ICICI Prudential Balanced Fund is a very popular product in this category and is the best performing balanced fund in the last 5 years. ICICI Prudential Balanced Fund has earned a return of 23.39% over the past one year as against the category average of 22.77%. The three-year and five-year returns are also more than the category average of 11.42% and 16.13%, respectively at 13.21% and 18.25%, respectively. The fund has 71.24% of its portfolio invested in equity comprising 77 stocks. This Rs 23,954 crore fund has 38.99% of the portfolio in the top three sectors, finance, energy, and auto. The fund has traditionally featured a high equity allocation, hovering at well over 70%, which is higher than the allocations of the peers. But in the last one year, the allocation has been moderated from 78-79% levels to 66-67% of the portfolio. The fund appears to practise some degree of tactical allocation based on market valuations. Within equities, well over two-thirds of the allocation is parked in large-cap stocks, which is higher than the peers' allocations. In terms of style, the fund follows a blend of growth and value styles. For the debt portion, the fund relies more on duration than credit calls to improve returns.  The expense ratio of the fund is 2.20% while the portfolio turnover ratio is 171%. The fund is benchmarked against CRISIL Balanced Fund Aggressive. Sankaran Naren, the veteran fund manager, manages this fund along with Manish Banthia and Atul Patel.

Tata Balanced Fund   Gem

This consistent fund has managed an impressive performance amid the swinging markets of the last seven years. It has been among the top ten funds in the balanced category in eight of the last ten years. This fund has handsomely outperformed the benchmark as well as the category over the last ten years. Ten year returns have been 10.38%. This compares very well with the category average of 8.79%. The one-year return of this Rs 5,875 crore fund is 18.72% as against the category average of 22.7%. Returns of 9.98% and 16.20% respectively, as against the category average of 11.42% and 16.13% during a three- and five-year period, reflects the fund's ability in stock selection. The fund has maintained a well-balanced portfolio comprising equity and debt with a mix of 73:27 respectively (on an average over the last three years). Finance, construction, and energy are the top three sectors. In terms of portfolio construction, the top three sectors comprise 40.08% of the portfolio mix. The fund has 56 stocks in the portfolio. The fund is benchmarked against CRISIL Balanced Fund Aggressive. The portfolio turnover ratio of the fund is 258% and the expense ratio is 2.11%. The fund is managed by Pradeep Gokhale and Murthy Nagarajan.

Reliance Regular Savings Equity Fund   Gem

Reliance Regular Savings Equity Fund is an equity-oriented balanced fund with 68.5% in equity. The one-year return of this Rs 10,498 crore fund is 28.62% as against the category average of 22.77%. Returns of 13.45% and 16.51% respectively, as against the category average of 11.42% and 16.13% during a three- and five-year period, reflects the fund's ability in stock selection. 48.21% of the portfolio is in the top three sectors, finance, construction and automobile. The fund has a very compact portfolio of 63 stocks. The fund is benchmarked against CRISIL Balanced Fund Aggressive. The portfolio turnover ratio of the fund is 306% and the expense ratio is 1.98%. The fund is managed by Mr. Amit Tripathi and Mr Sanjay Parekh.

Canara Robeco Balanced Fund Gem

Canara Robeco Balanced Fund is the oldest balanced fund that has exhibited smooth sailing across market cycles. The one-year return of the fund is 22.88% as against the category average of 22.77%. The fund’s three-year and five-year returns of 10.69% and 15.51% respectively are higher than the category average of 11.42% and 16.13% respectively. Canara Robeco Balanced Fund has 56 stocks in the portfolio. 38.46% of the portfolio is in the top three sectors, concentrated in finance, construction, and energy sectors. The good performance of Canara Robeco Balanced Fund across market cycles is attributable to its bias towards safety and stability. This is reflected in the significant proportion of large-cap stocks in its portfolio. The fund is benchmarked against CRISIL Balanced Fund Aggressive. The expense ratio of this Rs 1,494 crore fund is 2.45% with a portfolio turnover ratio of 256%. The fund is managed by Mr. Avnish Jain, Mr. Ravi Gopalakrishnan, and Mr Shridatta Bhandwaldar. 

FUND FLAVOUR

January 2018

Risk is the main quotient in the investment world. A favourable risk-reward balance attracts most of the investment from the public. As investing in large cap, midcap, small cap, multi-cap has different degrees of risk involved in it people tend to give a second thought before investing. Investing in Balanced Funds reduces the risk of downside to the fund to some extent as it has a good composition of fixed income securities and equity. The fund’s ability to give handsome returns in the long term is most suitable for a risk-averse investor.

Balanced Funds – the Modus Operandi

The balanced fund achieves the target of maintaining the balance because when the stocks fall, the bonds hold their value. When the stocks rise, the bonds yield lower value. Assume you have a Rs. 1,00,000 portfolio. The balanced fund allocation ratio that you have set is 75% stocks and 25% bonds. So now Rs. 75,000 is in stocks and Rs. 25,000 is in bonds. Due to market run, the stocks appreciated to 80,000. Now the fund manager sells some stocks worth Rs. 1,250 and puts them in bonds so that Rs. 78,750 (Rs. 1,05,000*.75 = 78,750) is in stocks and remaining in bonds. This brings your portfolio back to 75% stocks (Rs. 78,750) and 25% bonds (Rs. 6,250) ratio. This is done on a regular basis. The illustration may look simple but as your portfolio fluctuates wildly, this re-allocation brings stability. So when one asset class shoots up in value, it is sold and other is bought. This structural combination offers enhanced flexibility, ensures that the investment of the investor is safe, and returns good profits in the end.  That is why balanced mutual funds are one of best investment options. The division of the funds differs according to various mandates and the program offered by the respective investing agency. For example, equity hybrid funds from Birla Sun Life Mutual Fund invest 65% to the equity and the remaining in the debt. The debt hybrid funds see an investment of 75% in debt and the remaining in equity. Therefore, an investor should consider the options available to him or her to plan according to their requirements and the amount they want to invest in mutual funds.

A safer bet

If you are an investor seeking good returns with little tension of market volatility and the associated risks, balanced funds are a perfect fit to your portfolio. Shorn of jargon, balanced funds are mixed or hybrid investment schemes that bridge the gap between the riskier equity market and the relatively safer debt market. Depending on the nature and aim of investment, as well as the disposition of the investor, balanced funds can come in different shades in between the two extremes. Equity hybrid schemes, for instance, invest more in equities than debt. Debt hybrid funds, on the other hand, invest a minimum 75% of the funds in debt, and the remaining in equity.

Equity-Oriented Balanced Fund: In case of an equity-oriented balanced fund, a majority of the portfolio of the scheme would be invested in equities and equity derivatives. The minority portion of the scheme’s capital would therefore be invested in various debt and money market investments. The key characteristic of this fund is their aggressive capital appreciation, while interest income from debt investments is often the secondary goal of these schemes. That said an equity-oriented balanced fund is still a lower risk investment option than a plain vanilla equity mutual fund even though the returns offered by these two different fund types are often comparable.

Debt-Oriented Balanced Fund: For the conservative investor, a debt oriented balanced fund is just what the doctor ordered. With a major portion of its portfolio invested in debt and money market investments, these funds are potentially low risk investments with the capacity to deliver consistent returns in the long term. Moreover, the equity portion of the portfolio would help the fund benefit from rising equity capital markets and hedge the debt investments from interest rate and inflationary risks. With a risk level that is only marginally higher than the average debt mutual fund and proportionately higher ROI, a debt-oriented balanced fund is often considered to be an ideal investment for risk-averse investors.

Tax Considerations of Balanced Funds

Depending on the composition of the portfolio, separate taxation rules exist with respect to debt-oriented balanced funds and equity-oriented balanced funds. In case of debt-oriented balanced funds, non-equity investment taxation rules will apply, while in case of equity-oriented balanced funds, the rules regarding equity mutual funds will apply.

Taxation Rules of Debt-Oriented Balanced Funds:

In case of debt-oriented balanced fund investments, short term capital gains refer to profits generated through redemption or switch of fund units prior to completion of 3 years from the date of allotment, in case the units have been held for over 3 years, the profits from a redemption/switch transaction would be subject to long term capital gains. Short term capital gains tax rate in case of debt-oriented balanced funds is the same as the income tax slab of the investor. Moreover, as no TDS is deducted in case of unit redemption, the short term capital gains thus generated would be classified as “income from other sources” on the ITR. Long term capital gains obtained from debt-oriented balanced funds are subject to 20% tax on profits if indexation benefits are availed, while the applicable tax rate is 10% in case indexation benefits are not availed.

Taxation Rules of Equity-Oriented Balanced Funds:

For the purposes of equity-oriented balanced fund, current tax rules consider investments made in the fund for up to 1 year from the date units are allocated as a short term investment, while units held for longer periods are classified as long term investments. In case of short term capital gains obtained through redemption or switching of units prior to 1 year from date of allotments, 15% tax needs to be paid on the profits. As per current equity-oriented balanced fund taxation rules, long term capital gains incur nil tax and are thus tax free.

Taxation Rules of Dividend in Case of Balanced Funds:

Irrespective of whether you have invested in an equity-oriented or debt-oriented balanced fund, the dividend taxation rules are the same. Any dividends received by the investor from a balanced fund are completely tax exempt in the hands of the investor. However, these are subject to dividend distribution tax of around 30%, which is payable directly by the AMC to the relevant government taxation agency. This tax cost is transferred to the investor of the dividend plan as part of the scheme’s expense ratio.

Performance of Balanced Funds

Over the past one year, the net inflows into balanced mutual fund schemes have more than doubled. From around Rs 3,000 crore a year ago, the net inflow nearly tripled to Rs 9,000 crore in August 2017, before moderating to about Rs 6,000 crore in October 2017. In March 2017, net inflows into balanced funds even outpaced equity diversified funds. Clearly, investor participation has grown multi-fold. Several balanced schemes have burgeoned in size. As many as 6 schemes have crossed assets of over Rs 10,000 crore each. The CRISIL Balanced Fund - Aggressive Index generated a return of 19% over a 1-year period ending on November 24, 2017. Out of the 30 schemes on the list, 17 schemes delivered a return in excess of 20%. Those who had invested in the best balanced funds of the past 1-year could be sitting on gains in excess of 30%. The compounded returns over the past 3 years have not disappointed either. In the 3-year period ending on November 24, 2017, the CRISIL Balanced Fund - Aggressive Index delivered a compounded return of 8%. Over the same period, nearly 20 balanced fund schemes successfully generated more than 10% returns. The balanced fund schemes with the best performance leads the list with compounded returns ranging between 13%-15%. Clearly, balanced funds made the best use of the recently market rally and rewarded investors handsomely.

How have balanced funds managed to score such massive returns?

This is because balanced funds most often are not be balanced in the true sense. Most schemes, currently classified as balanced funds, invest about 65%-70% of their assets in equity. Some schemes have taken a quantum leap by investing in mid-cap stocks as well. With this aggressive equity allocation, balanced funds are able to score massive returns in a bull market. At times, some schemes even outperform many equity-diversified funds. Unfortunately, investors consider only returns and pay little heed to the high-risk asset allocation.

Who should consider investing in Balanced Funds?

Following are some key types of investors who should consider investing in balanced mutual funds:

Conservative Investors: A majority of conservative investors such as retired individuals as well as investors who are seeking a safe haven investment in the long term find balance funds as an ideal choice. This is obviously because the balanced strategy of the mutual funds ensures that the investor gets the best outcome no matter what occurs in the equities or bond market.

New Investors: For new mutual fund investors, their first investment more often than not is an ELSS i.e. a tax saver mutual fund. However, if you take away the tax benefit, balanced fund is probably a better starting point for new investors. With the balance of equity and debt instruments in its portfolio, the investor can look forward to reasonable growth of their investment while protecting the principal amount investments.

Investors Seeking Higher Returns than Debt Funds: On an average, debt funds have historically offered returns in the ball park of 10%. However, some investors might be willing to take marginally more risk to earn suitably higher returns. For such investors, a balanced fund is definitely the preferred investment route due to unique balance of risk and return that is available from this class of mutual funds.

Investment in Bull Markets: Bull markets, such as the one we are witnessing right now is a dream for those who are already invested, but a bane for those planning to make their investments. During market highs, equity mutual funds are priced at high levels which can significantly impact the returns in the long term especially in case of almost inevitable market correction. In such situations, a balanced fund with its conservative strategy is more reasonably priced and it can help protect the investor’s money when a correction eventually happens.

Why Balanced Funds are a must for retail investors

3 compelling arguments on why Balanced Funds are best for retail investors.

1) Inflation – Equities form major portion of balanced funds. This is a major shield in battling against inflation which will erode your purchasing power in later years. So, balanced funds protect your purchasing power and help fight inflation.

2) Income tax – Do you know that you need to pay income tax on all debt instruments. The interest from debt will be taxed as per your income tax slab. Balanced funds have this unique proportion where you can invest 35% in debt but still pay no tax on the interest earned from these debt products.

3) Volatility and asset allocation – The equity market always goes through ups and downs. There are periods of bull and bear phases. Nobody can predict with precision the beginning and end of each phase.

Balanced funds protect your money by proper asset allocation and timely rebalancing which determines major part of returns over long term for retail investors.

You should definitely look at investing in balanced funds if you do not want to maintain separate funds for equity and debt. It is also suitable if you do not like to invest directly in stock market. You can choose if you want the style to be aggressive or conservative when you sign the policy document.

Balanced mutual funds are the unsung hero in the stock market. It gives you peace of mind and optimum portfolio allocation. So what are you waiting for? Invest in the best balanced funds and reap the benefits. If you are a retail investor looking to avoid undue risk, look no further than the best balanced mutual funds.