Inflows into equity funds have continued to remain strong in the past two years as stock markets have seen steady upward movement. However, apart from equity funds, one category of funds that has seen huge participation from the investor is balanced funds. In the last financial year, balanced fund saw net inflows of Rs 36,610 crore taking its total assets under management at Rs 84,763 crore at the end of March 2017.
Success of balanced funds can be attributed to various reasons such as less risky compared to pure equity funds, advantage of both debt and equity and better in managing volatility in the markets. Industry experts say rise in the assets is largely due to the positive performance of balanced funds and participation from first-time retail investors.
Balanced funds usually invest in a mix of equity and debt and several funds even have aggressive equity component which can generate extra returns for the investors. These funds typically invest over 65% of their corpus in equity and the remaining in debt and cash. This means any gains are tax-free if the investment is held for more than one year. These schemes are more volatile due to the higher allocation to stocks. There are funds which follow asset allocation model to generate lower volatility returns.
Returns from balanced funds
The data from Value Research show that on an average, hybrid-equity oriented category has given returns of 18.49% in the last one year. Schemes such as HDFC Prudence Fund, Principal Balanced Fund, ICICI Prudential Balanced Fund and DSP BlackRock Balanced Funds have given returns of 25-30% in the last one year. Neelesh Surana, CIO, equity at Mirae Asset Global Investments (India) says, “This product is very simple and has a few advantages. For high net worth individuals (HNIs), balanced funds as a category are beneficial for them, due to its tax advantage. With exposure of both debt and equity, balanced funds helps automatic asset allocation to the investors.” In the last two years, returns have also come from debt side of the portfolio. “If we remove last few months, balanced funds also got positive returns from debt portion—which is very unusual. Now we have a few aggressive balanced funds in the industry and investors should carefully evaluate their option and investment accordingly,” says a fund manager.
Ideal for first-time investors
Many financial planners and distributors advise first-time investors to start investing in mutual funds through balanced mutual funds as they are less volatile compared to other diversified equity schemes. “We have seen many first-time investors starting with balanced funds as returns have been very positive for one year, three years and five years respectively. I think this category will continue to grow as its likely to give better returns than broader markets in longer duration,” said a marketing head of a leading fund house. Having a strong run in the past few years, balanced funds can continue to remain important and integral part of investors’ portfolio, irrespective of bull or bear markets, suggest market participants.Apart from getting the best of both equity and debt, balanced funds can also help retail investors create a huge corpus with systematic investment plans (SIPs).
For example, HDFC Prudence Fund has since its launch in February 1994, given compound annual growth rate (CAGR) return of 19.5%, shows data from Value Research. A SIP of Rs 1,000 per month (investment of around `2.78 lakh) since inception would have grown to over Rs 52.30 lakh. Wealth advisors say that there are two major reasons for the success of balanced funds in the last one-two years.
Firstly, they are tax efficient as they have similar tax structure as equity funds. Secondly, in the last few years mutual fund industry has been able to develop some low volatility schemes in this category which has helped investors.