Mix of debt & equity provides balance

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Updated: January 7, 2016 11:47:43 PM

Increased volatility across global markets has not spared India.

Increased volatility across global markets has not spared India. Severe crisis and slowdown faces many economies. Financial assets and commodities have moved in all directions, but in general showed a decline. This is in spite of war in West Asia and stress around the Ukraine – a situation that would have caused spurt in oil, gold and also many other commodities, as well as freight.

Amid such mix global sentiments what should an investor do? Should he allocate his entire holdings towards debt? Stop investing in equities? Such extreme calls would be rational only when the market moves in one downward direction. However, considering the current scenario, the best advice would be to a balanced approach to investing, which for debt and equity is provided by balanced funds.

What is a balanced fund?

A balanced fund is one which has a mix of equity, debt (bonds and money market instruments) in one single portfolio. This fund is geared for investors who are looking for a mix of income, safety and capital appreciation. While the risk in balanced funds is lower than of pure 100% equity funds, due to some portfolio allocation towards debt, their returns would be lower as compared to equity funds in an equity bull market. Based on the market condition the portfolio manager may change the asset mix in the portfolio in order to earn higher risk adjusted returns. The taxation of balanced funds is the same as of an equity fund if the equity held in the fund is at least 65% of the portfolio. Fund managers would therefore maintain 65% as the minimum equity exposure.

Who should invest?

Contrary to the popular belief that only investors with medium risk profile shall consider investing in balanced funds, every investor could consider having a certain proportion of the portfolio allocated towards balanced funds as a part of asset allocation. For an investor with lower risk appetite, the proportion of allocation towards balanced fund can be higher as compared to the one who has high risk appetite who could have more equity funds.

Balanced funds provide best of both the worlds of equity and debt. An investor who does not want to regularly rebalance his portfolio allocation between debt and equity based on changing market condition can opt for investing in balanced funds. There are also debt-oriented hybrid schemes like monthly income plan (MIP), which invests predominantly in debt schemes while having an equity exposure of 15% – 25%.

Though it has become a norm among investors to choose funds based on their returns or performance, returns should not be the sole criteria for choosing any fund. In this case of balanced funds, one should look at performance as well as the asset and category allocation. The allocation will differ from one fund to another based on the fund manager’s strategy, however one should choose a fund whose objective best matches the desired risk profile.

For example, Birla SL Dynamic Asset Allocation Fund has a high allocation towards equity and a very low towards debt. Thus, this fund may not be suitable for an investor who has moderate risk profile. Whereas funds of HDFC, ICICI, Reliance and Tata are well spread across different asset classes and categories which has even yielded good returns on the investments. Since the sole objective of the balanced fund is to have a well-diversified portfolio spread across different categories and asset classes in order to minimise the risk, one should ideally choose a fund which is well diversified. Also while investing, make the investment mode through systematic investment plan (SIP) which will further help to reduce the risk and the impact of market volatility in the portfolio.

The writer is CEO & founder, Right Horizons

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