1. Mutual funds: Who should invest in balanced funds? All you want to know

Mutual funds: Who should invest in balanced funds? All you want to know

Hybrid funds are a type of mutual funds that buy a combination of equity shares and fixed income instruments and provide both income and capital appreciation while avoiding excessive risk.

Published: July 5, 2017 3:59 AM
mutual funds, how to invest in mutual funds, investment in mutual funds, equity shares Such diversified holdings ensure that these funds will manage downturns in the stock market without too much of a loss as compared to an all-equity fund.

By- Deepak Jasani

Hybrid funds are a type of mutual funds that buy a combination of equity shares and fixed income instruments and provide both income and capital appreciation while avoiding excessive risk. Such diversified holdings ensure that these funds will manage downturns in the stock market without too much of a loss as compared to an all-equity fund. But on the flip side, hybrid funds, also known as balanced funds, will usually increase less in value and provide lower returns than an all-equity fund during a bull market. Thus these type of funds are meant to diversify a little of your equity risk by exposure to debt, while maintaining decent returns as well.

Hybrid mutual funds (equity-oriented) allocate 60-70% of their assets in stocks and the balance in fixed income instruments. An allocation of 65% or more towards equity entitles the holders of units to concessional tax treatment in terms of dividend and capital gains.

Folios growth

Balanced funds saw 10 lakh additions to folios in FY17 as compared to 5 lakh additions made in FY16. The total number of folios in balanced funds now stands at 35.49 lakh. This was the best year in terms of folio additions since 2007-08 when 11.25 lakh folios were added. This data shows that balanced funds have clearly emerged as a favorite with a particular set of investors.

AUM growth

Data from Association of Mutual Funds in India (AMFI) show that assets under management (AUM) of this category have soared to `1,02,000 crore (May 2017) from `42,695 crore only a year back (May 2016). There can be two reasons behind the increase in AUM—increased inflows or increase in asset prices.

A look at monthly inflows to balanced funds and movement in the benchmark indices tells us that the initial increase in the AUMs since February last year was due to rebound in the equity markets starting from that month (Nifty started to rise after making a low of 6829 in Feb 2016).

Further, the performance of balanced funds was helped by the falling interest rate cycle (10-year G sec yield made a high of 7.85% in February 2016 compared to 6.5% now) leading to a spectacular rally in the debt market as well. Typically, balanced funds invest in debt instruments with average maturity of more than five years which benefit more from an interest rate cut. As a result, the returns of balanced fund was helped by the performance of both the equity and debt portions.

Dividend plans

One other reason for the growing popularity of hybrid funds is that between March 2015 and January 2016 a lot of fund houses started to offer dividend plan in their hybrid schemes. Combined with tax efficiency and low interest rates in other fixed income instruments available to investors, this was a great attraction for investors to invest in hybrid funds.

However, it needs to be realised that dividends can be paid by mutual funds only out of realised profits—whether current or accumulated. If the correction in equity or debt markets continues for long and is deeper than expected, these funds have the option of reducing the monthly dividends.

Hence, investors who wish to earn tax efficient returns which are higher than debt returns but want to assume lower than full equity risk should look at investing in hybrid funds. In case this category pays out regular dividends, it would also meet the regular cash flow requirements of the investors in a tax-efficient manner.

The writer is head, retail research, HDFC Securities

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