Financial advisors are advising first-time investors in equities to invest in these funds for their lower volatility compared to pure equity funds. Investors should, however, bear in mind that these funds do carry certain risks.
For conservative investors, this level of equity investment could be too high. “Balanced funds will definitely fall when the markets fall, though they may fall less than pure equity funds,” says Vidya Bala, head of research, Fundsindia.com.
The current high valuations of mid- and small-cap stocks is also a cause for concern. “The Nifty Midcap Index has historically traded at a discount of 10-35 per cent to the Nifty 50 Index. In recent times it has been trading at a premium. We feel this is not sustainable,” says Parekh, whose fund has a 17.08 per cent allocation to mid- and small-cap stocks.
Risk could also lie within the fixed-income portion of the portfolio. “Many fund managers take duration risk on the fixed-income side,” says Kaustubh Belapurkar, director-manager research, Morningstar Investment Advisor India. Investors need to understand their own risk profile before betting on these funds. Conservative investors who want a lower equity exposure (than 65 per cent) may buy a debt fund or two. “Doing so will bring down the overall equity exposure in their portfolio,” says Belapurkar. Investors should also look at past calendar-year returns. “If in a falling market the balanced fund managed to contain downside risk better than its peers, you may opt for it,” says Bala. Parekh suggests having sub-categorisation of balanced funds based on market cap. “Investors with a lower risk appetite should consider funds with a higher large-cap exposure,” he says. By investing for five years or more, too, you can effectively counter the risk in these funds.
Conservative investors may also look at equity-savings or equity-income schemes, which invest in equity, debt and arbitrage opportunities and have a risk-return profile between that of monthly income plans (MIPs) and balanced funds. “Invest in them if you want lower volatility and have a time horizon of three years,” says Bala. She, however, warns that their returns will not match those of balanced funds. Those wanting to build wealth and having a time horizon of five years or more should stick to balanced funds, she says.