The enigma behind balanced funds

Font Size

Print

Feedback

Email

Discuss

Related Articles

MFs see 8.6% rise in AUMsMFs investor base grow faster than AUM

: cycle, this invariably produces decent returns with far less volatility and heartburn. Over the last five years, the average equity diversified has given returns of about 31% p.a. and the average equity-oriented balanced fund has produced 23% but with lower volatility.

Not only does this balanced strategy get stable returns, it is also more tax-efficient than it would be if you executed it yourself. There are two reasons for this. One, every time you would sell you would pay capital gains tax. When funds buy and sell with their portfolio, there’s no tax liability to the end-investor.

Two, when you hold any kind of fixed income investment yourself, it is not liable for long-term capital gains tax since only equity income is exempt from that. However, if a balanced fund keeps its equity allocation above 65%, then the investor’s entire investment is treated as equity for tax purposes and thus becomes free from long-term capital gains tax.

Which brings us to the original puzzle-why aren’t fund companies and salesmen enthusiastic about balanced funds? I believe that’s because it’s difficult to package balanced funds in some kind of a returns-maximising trick story.

As the fund industry has gravitated towards consumer-goods type feature-driven products, simple and reliable ideas like balanced funds get side-tracked. But that doesn’t mean that the sensible investor has to ignore them too. There are a handful of excellent balanced funds with solid long-term available-you just have to seek them out.