Mutual funds are one of the most attractive investment options for people looking for good returns along with a high degree of capital safety. The ease of investment and the wide array of options available in the market to choose from make them attractive.
Investors looking for long-term growth benefit more from MFs compared to the ones who seek monthly rewards. Nonetheless, balanced mutual fund are increasingly finding a place in investor portfolios. According to a recent report, balanced funds raked in Rs 3275 crore in October 2016, higher than the Rs 3,248 crore that went to equity funds.
What are balanced mutual funds
While equity mutual funds carry high risks, especially in a volatile environment, debt mutual funds have a conservative approach with low returns. Balanced mutual funds on the other hand are a good mix of equity and debt, thus attracting investors who are wary of risk but do not want to forego returns.
Equity-oriented balanced mutual funds invest 65-80 per cent in equity securities and remaining in debt securities. With decent returns and a tax treatment at par with equity funds, balanced funds attract high capital value investment. Units held for 12 months are tax-exempt if the securities transaction tax has been paid.
Balanced mutual funds and dividend payouts
With rise in popularity of balanced funds, the fund houses have seen growing competition. Balanced mutual funds have witnessed inflows to the tune of Rs 2,079 crore in the month of July 2016, alone. Thus, with rising inflows and improved performances of markets, balanced mutual funds are increasingly offering dividend payouts.
Balanced funds that offered annual dividends in the past have now started offering monthly and quarterly dividends to attract more investors. However, we think drawing monthly dividends is not such a good idea.
For investors seeking regular income from mutual funds, a monthly dividend from balanced funds may appear to be a good option at first glance, as the funds are usually able to generate monthly dividends in a bullish market, but there is no certainty that the trend would continue over a period of time.
The dividend payout process
Dividends are paid out from distributable surplus accumulated over a period of time. The only way funds can payout dividends is when they have accumulated surplus, thus when the markets become unfavorable,fund managers have no option but to either reduce the dividend payout timeline or not pay dividend at all. So, if you seek regular income, opting for a growth mutual fund with a systematic withdrawal plan is a relatively better option.Unlike dividend payouts, SWP can be customised to generate regular income.
New investors often do not realise that dividends are paid out from capital investments and not over and above the invested amount. For example, if you hold 100 units of a mutual fund and it offers a dividend of Rs 5 per unit, you may receive Rs. 500 as dividend payout every month but the NAV of your investment is adjusted proportionally.
Analysing balanced mutual funds for inclusion in portfolio
Including balanced funds in the portfolio can be a great thing if you are not going for dividend payouts, as it provides cushion from market volatility while ensuring high returns. Through investment in both, equity and debt instruments, this investment option offers diversification like none other. Balanced mutual funds also offer tax benefits on long-term capital gains for units held over a year.
Things to consider before investing
Check on the equity and debt investment component of the balanced fund before making an investment call. An equity-oriented fund would have at least 65 per cent exposure to equity.
Like you do with other mutual funds, compare the expense ratio of the funds, which amounts to administrative, management and advertisement costs. Opt for the one which has a low expense ratio and a good performance record.
Check on the risk level and fund ratings along with the performance and experience of the fund manager. Since balanced mutual funds have a large exposure to the equity market, you don’t want to leave your funds in an amateur’s hands.
Balanced mutual funds are an ideal medium-to long-term investment option, but dividend payouts should not be your yardstick to choose such funds.
The author is CEO, BankBazaar