Balanced funds to the rescue

Investors in both equity and debt are in a quandary. With equity markets being highly volatile, it is very difficult to take a call whether one can enter now. On the other hand, the returns from debt instruments like a fixed deposit, while very good now, could be peaking or, at best, give only marginally higher returns.

In such a situation, one could look at balanced funds, in which there are options like monthly income plans (MIPs), equity balanced funds and asset allocation schemes. The latter, typically, is positioned for investors who are retired, with their regular income needs.

Mahendra Jajoo, executive director and chief investment officer (fixed income) at Pramerica Mutual Fund, says: "Since MIPs are a combination of both equity and debt, it will let you cushion volatility." MIPs invest a large part in debt instruments (65-70 per cent) and provide monthly returns, based on the performance of the scheme. The 30-35 per cent in equities gives the instrument an upside in good equity markets. If equity markets were to fall sharply, the high debt component ensures the scheme does not do too badly.

In the case of equity balanced funds, the larger part (60 per cent-plus) is invested in stocks and the rest in debt. The debt component provides some cushion to the scheme in situations where markets are going for a free fall.

Otherwise, there are asset allocation funds or dynamic price-to-earnings funds, where the asset allocation varies with the situation. Some balanced funds also have gold as a component.

MIPs and balanced funds help in reducing your portfolio's risks, due to limited equity exposure, especially in down-market conditions. According to data from Value Research, the balanced funds category (debt-oriented, aggressive) has given negative returns of 0.72 per cent in the last year, implying little loss of capital. MIPs, on an average, have given returns of 4.02 per cent. All equity schemes are in the negative during this period. Pure debt funds have all given positive returns during this period. In the past three months, MIPs gave 1.1 per cent and balanced funds were down marginally at 0.26 per cent.

As far as strategy goes, some fund managers say one should consider investing MIPs that have a higher amount of exposure to gold, as the continuing volatile equity markets could see more upside in gold prices.

The retired, depending on their financial needs, can have 40-50 per cent of their money in MIPs. The younger lot can have an exposure of 15-20 per cent in MIPs if they want to be safe and also get higher returns than debt instruments. Slightly more aggressive investors, with a horizon of more than three years, can consider equity balanced funds, as these have the potential to offer double-digit returns.