Have you invested in a balanced fund? Do you know why? On the face if it, this might sound like a no-brainer—of course you know why you invested in a balanced fund.
For the “balance” between high and secure returns. But that is exactly what our question is: do you know what the balance is? Most financial planners and experts say that investors’ understanding of balanced funds does not match with what these funds really are.
THREE FACES OF BALANCED FUNDS | |
Aggressive: Suits investors looking for high returns but with greater debt cushion than equity funds. | |
| Examples: | |
| HDFC Prudence | 76:20 |
| UTI Balanced | 80:19 |
| ICICI Pru Child Care | 96:3 |
| Moderate: Not for investors with high returns as priority. Invest in them for reasonably good returns and security. | |
| Examples: | |
| FT India Balanced | 68:31 |
| Tata Balanced | 66:17 |
| Principal Child Benefit | 60:17 |
| Conservative: For investors who want safe but higher returns than those from fixed deposits, bonds and pure debt funds. | |
| Examples: | |
| JM Balanced | 39:3 |
| UTI CRTS ’81 | 31:62 |
| Templeton India Pension Plan | 41:52 |
Ratio (Equity:Debt)* | |
| * Ratios don't add up to 100 because cash holdings are not shown. All ratios as on November 30. | |
Most investors believe balanced funds split investments equally (or almost equally) between equity and debt. The reality: the top 10 balanced funds have equity exposure of over 75%.
In fact, the best performing balanced fund in the past three months, LICMF Balanced, has over 80% of its corpus invested in equities. In October, it had over 90% exposure to equities, almost as much as any equity diversified fund. Not a very comfortable revelation for most investors.
“Clients investing in balanced funds are not looking for more than 50-60% equity exposure,” says Anil Chopra, CEO and director, Bajaj Capital. Most financial planners endorse this view. The problem is that only a few funds offer such an asset mix. This means that most balanced fund investors, including you, might have taken more risk than you think you have.
“All it takes is one correction in the markets and investors start worrying about the risk profile of their portfolio,” says Sharadd Mohan, a certified financial planner. Then it might be a little too late to realise what your actual risk position was. It pays to get the name and nature of your balanced fund right.Let us introduce you to the entire family of funds in this category. The balanced funds which are hogging the limelight because of nearly 50% annualised returns are equity-oriented balanced funds.
At least 65% of their corpus is invested in equities. This is because, since June 2006, only those funds that invest 65% or more in equity get special tax exemption. Shortterm capital gains (where the holding period is less than a year) from these equity-oriented funds are taxed at 10%, while long-term capital gains (holding period of over one year) are tax free.
Then there are debt-oriented balanced funds. They have a mandate of offering you secure returns and ought to have majority investments (60-70%) in debt instruments. Obviously, returns can be lower too.
But some of these funds have upped equity investments to the maximum mandated to benefit from the current bull run. An average 50:50 debt to equity mix is a rarity even in this segment.
There are also monthly income plans (MIPs) that invest only a small portion of their corpus in equities. With only 10-25% equity exposure, these funds are well insulated from market swings but give better returns than fixedincome instruments and pure debt funds.
There is another category called asset allocation funds. These funds spell out a specific equity-todebt ratio and stick to it.
As and when the equity exposure changes with market movements, they buy or sell stocks to realign their asset allocation. Returns from these funds vary according to the predetermined asset allocation. Yes, that is one long list.
But now that you know them all, what should you—the investor—do? First, check whether the balanced fund in your portfolio has the risk exposure you want. Most often, investors are only bothered with returns; as long as that is good, everything else is fine.
This may be the right strategy to follow for equity funds, but not when you are looking for that “balance factor” in your investments. If you want a specific equity debt ratio and a good asset allocation fund is offering it, go for it.
But the question many balanced fund investors may ask is: how smart is it to rely on these funds for asset allocation? Isn’t it better to invest in pure debt and equity funds and create a customised “balance” for yourself?
Kartik Varma, co-founder of investment consultancy firm iTrust, favours balanced funds. “Investors cannot switch from equity to debt and vice versa to optimise gains or reduce losses as promptly as the fund manager of balanced funds. Also, they are spared the taxes and fees that switching from equity to debt or vice versa attract.”
Every time you buy, there is an entry load. Sometimes, an exit load is charged on selling before a specific period. Also, there are taxes to be paid. Moreover, how many investors are savvy enough to understand what asset mix is best for them, let alone choose which balanced fund can help in achieving it?
Your choice should depend on personal expertise and involvement with your finances. For investors with clear long- and short-term goals and a good idea of their asset allocation needs, blending equity diversified and debt funds on their own might give better results than investing in balanced funds.
Calculations show that if you choose top debt and equity funds, returns are higher than balanced funds, though fund loads and penalties nullify some of it.
But in most cases, you don’t need to tweak the asset ratio more than twice a year. The bottom line: when it comes to investments, don’t go by the name alone. It could be an expensive mistake.
