Balanced funds - Growth from equity and stability from debt

Balanced funds - Growth from equity and stability from 

debt

Balanced Funds provide investors with an option of a single mutual fund that combines both growth and income objectives by investing in equities for growth and debt for income. These funds help to diversify equity risk by exposure to debt while maintaining potential returns as well.

Advantages of investing in balanced funds :

  

 1. Exposure of both asset class viz. Equity and Debt
Spreading one’s investment across asset classes helps in reducing the market risk and moderates the effect of a single asset class performance on the portfolio value. Table 1 shows that in the bear phase, balanced funds represented by the CRISIL – AMFI Balance Fund Performance Index fell less than the CNX Nifty. During the Eurozone crisis in 2011-13, CRISIL – AMFI Balance Fund Performance Index rose nearly 1% as against 2% fall by the market benchmark CNX Nifty. This clearly indicates the downside risk protection provided by the category.

   

Market phase analysis

Period	From Date	To Date	No of years	CRISIL - AMFI Balance Fund Performance Index	CNX Nifty	CRISIL Balance Fund Index
Bull phase of 2003-07	01 Apr 2003	31 Dec 2007	4.8	42.18	47.0	30.02
Sub-prime crisis	01 Jan 2008	31 Mar 2009	1.3	-35.93	-43.4	-27.62
Sharp bounce back post sub-prime crisis	01 Apr 2009	31 Dec 2010	1.8	51.57	48.8	32.62
European crisis	01 Jan 2011	28 Jun 2013	2.5	0.95	-1.9	2.06
Pre and post-election rally	01 Sep 2013	30 Jun 2015	1.83	34.85	26.09	21.23

Source: NSE and CRISIL Research Report. Data as of June 30, 2015.
The above table is given to understand the performance of various indexes under different market cycles and is not indicative of any future results. Please consult your financial advisor before taking any investment decision.

   2. Asset allocation is automatic and tactical
If one were to hold separate equity and debt portfolios to manage a similar asset allocation, it would have been operationally more tedious besides involving churning cost and tax implications. Further, one may not be able to tactically adjust equity allocation as per market movements while fund managers are the experts to take a tactical call based on market movements. Balanced funds provide all of this in a single structure instead of the manual interventions if separate investments were made in equity and debt funds.

   3. Tax benefits
Most balanced funds usually have 65% exposure to equities, which allows them to be taxed like equity funds. These funds enjoy tax-free returns if the holding period is greater than one Dividends paid and received are tax-free irrespective of the holding period. 

Please refer to scheme information document of Balanced Funds for detailed asset allocation.

Strong performance – an added advantage for investors :

Performance of balanced funds

Returns over one year are annualised . Data as of June 30, 2015
Source: NSE and CRISIL Research Report. Data as of June 30, 2015
The above chart is given to understand the performance of various indexes under different market cycles and is not indicative of any future results. Please consult your financial advisor before taking any investment decision.

Thanks to improved sentiment for the equity asset class of late, the penchant for balanced funds has increased as is visible from the rise in assets under management (AUM). As per Association of Mutual Funds in India (AMFI) data, balanced funds’ AUM doubled in the past one year from Rs 15,914 cr as of June 2014 to Rs 32,259 cr as of June 2015. In terms of performance, balanced funds represented by CRISIL – AMFI Balance Fund Performance Index have beaten CNX Nifty and CRISIL Balanced Fund Index across most of the periods analysed. In a one-year period ended June 30, 2015, CRISIL – AMFI Balance Fund Performance Index has given 13% compared to CNX Nifty’s 10% and CRISIL Balanced Fund Index’s 11%. Over a decade, CRISIL – AMFI Balance Fund Performance Index outperformed the benchmark by giving returns of 17% vs CNX Nifty’s 14% and CRISIL Balanced Fund Index’s 12%.

Summing up:
Moderate risk takers can consider take exposure to balanced funds, which enable investment in key asset classes - equity and debt - in a single structure. However, returns from these funds are market-linked and, hence, investors are advised to consult their financial advisor and invest as per their risk-return profile.

Happy Investing