Balanced Mutual Funds

 

Balanced funds are mutual funds that invest in both equities and debt instruments.They normally keep their equity component in the range of 60%-75% and the  rest in debt products or cash.Some balanced mutual funds are considered to be more aggressive in that they have a larger equity component.For example, HDFC Prudence keeps its equity allocation around 75% in most of the cases and rest 25% in debt or cash. However,others like Reliance Regular Savings Balanced are considered less aggressive and have a lower equity component around 60-65% .

From the taxman’s point of view, any mutual fund which has equity component more than 65% is considered as an “Equity Fund” and so long term capital gains from sale of balanced mutual fund units too are exempted from tax after one year just like in the case of pure equity mutual funds .

As balanced funds have to maintain their ratios between equity and debt by a fixed percentage, they have to periodically adjust their asset allocation.So, if a balanced fund has a ratio of 70:30 (Equity: Debt) and suppose it reaches 77:23, the fund manager will make sure that he sells the excess equity portion to rebalance the fund back to 70:30.This asset allocation by  balanced funds  leads to superior returns over the longer term. But in the short term, balanced funds will not out perform pure equity based funds especially in bull runs. So you always have to give balanced funds a long time to see the performance.

As balanced funds are not exposed to equity in the same way as regular equity diversified funds whose equity exposure is generally 95% or more in an average scenario,their fall in case of market crash is lower than pure diversified funds.This is why these funds do better in downturns than diversified equity funds. For example in CY 2008, balanced funds lost 37.88% against a fall of 53.08% in large-cap equity funds and 59.01% in case of mid- and small-cap equity funds.And a similar performance was recorded in CY 2011, when balanced funds lost 13.47%, whereas large-cap diversified equity funds lost 24.33% and mid- and small-cap funds lost 24.99%.Thus balanced funds are a great choice for people who find the fall in the value of  their portfolio tough to handle.

Moreover as  equities are attractively valued with limited downside, and interest rates are at their peak, and likely to fall,leading to capital gains on bonds,now is a good time to buy balanced mutual funds.

And BTW a SIP in a balanced fund or a long term lump sum  investment in a balanced fund might even be a good idea. Over the  14 yr period from Jan 1997 to Mar 2011 a SIP investment of Rs. 1,000 per month in HDFC Prudence would have become Rs 13.6 lacs i.e. a return of 25.93% CAGR.The same 1,000 per month invested in HDFC top 200, would have become 13.9 lacs i.e.a return of 26.20% CAGR, marginally more … Which shows that despite having much lower equity exposure, HDFC Prudence has given almost equal returns like HDFC Top 200, can be called out-performance. Here is the chart of how the corpus was moving in both HDFC Prudence and HDFC top 200 for 14 yrs (SIP of Rs 1,000/month).

 If you invested Rs 1 lac in HDFC Prudence on 1st Jan 1997 and  the same amount of money in HDFC Top 200 on the same date and redeemd both investments on 11th Mar 2011. The former would be worth around Rs 24 lacs (CAGR return = 24.94%), whereas the latter would have been worth approx 21 lacs (CAGR return = 23.78%). See the chart below to look at how the corpus moved per month in case of one time lumpsum investment.