Balanced funds good for first-timers, retirees

With AMCs providing as many as 4-6 balanced fund options, investors need to be cautious before buying

The popular balanced fund category can be confusing for investors. Many fund houses have as many as six schemes in this category, all following different strategies. To top it, there are funds from different asset management companies (AMCs) that have similar names that have very little in common, in terms of strategy.

To get tax benefit of equity-oriented funds, a majority of the schemes try to maintain equity exposure of 65 per cent or more. They either keep about 70 per cent or more of their portfolio in stocks or use a combination of stocks and derivatives. However, there are some others that keep equity exposure between 25 and 50 per cent, though they are treated as debt funds and investors are taxed on withdrawal.

 

But their returns in the volatile market have been attracting investors. The large-cap equity funds category has returned 0.05 per cent in the past year, according to data from Value Research. The multi-cap category gave 2.47 per cent returns. However, equity-oriented hybrid funds have 4.58 per cent returns and comparable debt-oriented funds have 7.18 per cent average returns. In the three and five-year period, equity-oriented balanced funds have fared better than large-caps.

“Investors started flocking to equity-oriented balanced funds after the government changed tax treatment for debt funds in the 2014 Union Budget,” says Dhaval Kapadia, director — investment advisory at Morningstar Investment Adviser.

Earlier, investors could claim long-term capital gains on non-equity funds after one year. It was changed to three years. In 2014 alone, equity-oriented balanced funds saw net inflow rise to around Rs 9,550 crore from Rs 25 crore a year earlier, according to Value Research.

 

However, the different strategies have made evaluating these funds more complex. Experts say the decision comes down to the amount of risk an investor can take. If you don’t want volatility associated and are willing to compromise on returns slightly, you can look at equity-oriented balanced funds.

“In such schemes, fund managers take a call on the market situation and change debt-to-equity allocation, accordingly. This helps investors who don’t want to actively rebalance their portfolio. The fund manager does it for them,” says Suresh Sadagopan, founder of Ladder7 Financial Advisories.

An ICICI Prudential spokesperson says the general tendency is to invest in equity when the markets are surging high and pulling out when markets underperform. To eliminate this psychological barrier, it may be prudent for investors to add asset allocation funds to their portfolio. They invest in equities when markets are cheap (based on price-to-book value) and book profits when markets are high. Equity-oriented balanced schemes also enjoy no tax if investors stay for more than a year.

These funds suit those who don’t have surplus money to invest in multiple funds for proper asset allocation, says Vidya Bala, head of mutual fund research, FundsIndia.

Equity-oriented balanced funds, however, may not be the best option for those who are first-time equity investors. There are many who traditionally invest in fixed deposit and want to try out equities for slightly better returns. They should rather look at monthly income plans or debt-oriented balanced funds, which keep equity exposure in the range of 25-40 per cent. This holds for retirees as well, who should not take too much exposure to equities.

But if you have the money for proper asset allocation based on risk profile, experts say it’s best to go for a combination of large-cap equity fund and pure debt funds rather than balanced funds. “It always helps to stick with investments that you can understand clearly and have fixed mandate,” says Manoj Nagpal, chief executive officer of Outlook Asia Capital. He says many balanced funds have changed their strategies after the change in taxation. This can be risky as it can happen again.