Strike the Right Balance while Investing?
Strike the Right Balance while Investing?
"Balance is not something you find. It’s something you create" -Jana Kingsford
A balanced approach, like in other facets of life, is also essential when it comes to investing. In today’s times when we have witnessed the markets having displayed an unprecedented bull, the importance of striking a balance somewhere along the investing journey couldn’t have been more relevant, ever before.
Balancing your portfolio provides the much need cushioning against market volatility while also offering stable returns. And it’s very much possible, for you, to achieve this without having to compromise much on the returns part. To help you balance your investments, Equity Mutual Funds offer a category of funds that provide the up side and tax efficiency of Equity funds along with the relatively stable returns of Debt funds. They are a convenient way to have the best of both worlds!
Balanced Mutual Funds as they are popularly known helps in striking the right balance between Equity and Debt. Balanced Mutual Funds are excellent boundary management tool while investing. Boundary Management means managing the limit of exposure to equity in various market situations. They maintain around 65-75% exposure in equities while the rest is invested in debt instruments.
In case of Balanced Mutual Funds, the fund manager has the option to modify asset allocation or in other words strike the right balance between equity and debt allocation by increasing or reducing the debt portion of the portfolio depending upon the outlook on equity. This helps Balanced Mutual Funds in delivering relatively consistent returns.
As mentioned above given the recent bull run in equity markets, Balanced Mutual Funds have gained immense popularity. This is evident from the steady increase in inflows and rising asset size of this category. Assets under Management (AUM) of Balanced Mutual Funds stood at Rs 1.28 Lakh crores in Aug’17- more than double of what it was in Aug’16.
The Category has been preferred by investor because of four unique features it offers:
1) Strong Performance: Balanced Mutual Funds have a track record of giving superior returns in the past. Across various time frames, Balanced Mutual Funds as a category has consistently outperformed its benchmark Crisil Balanced Fund Index and the popular equity market benchmark index Nifty 50 by wide margins.
CAGR performance (Data Source: ICICIdirect Research, Data as on August 31, 2017)
By investing in top rated Balanced Mutual Funds, you could create wealth to meet your medium to long term financial goals.
2) Consistency in returns: As Balanced Mutual Funds invest in two asset classes – Equity & Debt which have low correlation, Balanced Mutual Funds are an effective method to diversify your portfolio and also manage risk to some extent.
By maintaining equity allocation between 65%-75%, these funds limit exposure to continuous bull or bear phases in the equity markets.
(Data Source: ICICIdirect Research, data as on August 31, 2017)
As seen from the above table, in bear phases (when equity markets are falling continuously), the fall in returns in case of Balanced Mutual Funds has been lower than Nifty50 and in bull phases (when equity markets are rising continuously) the returns were in line or even better than Nifty50.
3) Downward Protection: As Balanced Mutual Funds have the cushion of debt, it helps in curtailing losses when equity markets struggle.
(Data Source: ICICIdirect Research, data as on August 31, 2017)
As shown above, historically returns of Balanced Mutual Funds have fallen lower than Nifty50 during Equity Market downturns. This is because lower proportion of the fund is invested in Equities and the stable return from its debt component ensures that Balanced Mutual Funds does not suffer as much as pure Equity Funds when equity market declines.
4) Tax efficient as Equity Funds: Equities or Equity Mutual Funds enjoy significant tax advantage over other asset classes and this in turn helps in increasing the returns that you get from your investments.
Since Balanced Mutual Funds maintain 65% of their portfolio in equities at all times, they are taxed similar to equity mutual funds, i.e. Capital Gains are Tax free if units are sold after 365 days and 15% Capital Gains Tax is applicable if units are redeemed on or before 365 days of investment. Also, dividends in case of Balanced Mutual Funds are tax-free similar to Equity Mutual Funds.
The Bottom Line
Investing can (and should) be fun. It can be educational, informative and rewarding. By investing in Balanced Funds, you could not only manage risk and diversify your portfolio but also earn superior returns in the long term.
Happy Investing
Strike the Right Balance while Investing?
"Balance is not something you find. It’s something you create" -Jana Kingsford
A balanced approach, like in other facets of life, is also essential when it comes to investing. In today’s times when we have witnessed the markets having displayed an unprecedented bull, the importance of striking a balance somewhere along the investing journey couldn’t have been more relevant, ever before.
Balancing your portfolio provides the much need cushioning against market volatility while also offering stable returns. And it’s very much possible, for you, to achieve this without having to compromise much on the returns part. To help you balance your investments, Equity Mutual Funds offer a category of funds that provide the up side and tax efficiency of Equity funds along with the relatively stable returns of Debt funds. They are a convenient way to have the best of both worlds!
Balanced Mutual Funds as they are popularly known helps in striking the right balance between Equity and Debt. Balanced Mutual Funds are excellent boundary management tool while investing. Boundary Management means managing the limit of exposure to equity in various market situations. They maintain around 65-75% exposure in equities while the rest is invested in debt instruments.
In case of Balanced Mutual Funds, the fund manager has the option to modify asset allocation or in other words strike the right balance between equity and debt allocation by increasing or reducing the debt portion of the portfolio depending upon the outlook on equity. This helps Balanced Mutual Funds in delivering relatively consistent returns.
As mentioned above given the recent bull run in equity markets, Balanced Mutual Funds have gained immense popularity. This is evident from the steady increase in inflows and rising asset size of this category. Assets under Management (AUM) of Balanced Mutual Funds stood at Rs 1.28 Lakh crores in Aug’17- more than double of what it was in Aug’16.
The Category has been preferred by investor because of four unique features it offers:
1) Strong Performance: Balanced Mutual Funds have a track record of giving superior returns in the past. Across various time frames, Balanced Mutual Funds as a category has consistently outperformed its benchmark Crisil Balanced Fund Index and the popular equity market benchmark index Nifty 50 by wide margins.
CAGR performance (Data Source: ICICIdirect Research, Data as on August 31, 2017)
By investing in top rated Balanced Mutual Funds, you could create wealth to meet your medium to long term financial goals.
2) Consistency in returns: As Balanced Mutual Funds invest in two asset classes – Equity & Debt which have low correlation, Balanced Mutual Funds are an effective method to diversify your portfolio and also manage risk to some extent.
By maintaining equity allocation between 65%-75%, these funds limit exposure to continuous bull or bear phases in the equity markets.
(Data Source: ICICIdirect Research, data as on August 31, 2017)
As seen from the above table, in bear phases (when equity markets are falling continuously), the fall in returns in case of Balanced Mutual Funds has been lower than Nifty50 and in bull phases (when equity markets are rising continuously) the returns were in line or even better than Nifty50.
3) Downward Protection: As Balanced Mutual Funds have the cushion of debt, it helps in curtailing losses when equity markets struggle.
(Data Source: ICICIdirect Research, data as on August 31, 2017)
As shown above, historically returns of Balanced Mutual Funds have fallen lower than Nifty50 during Equity Market downturns. This is because lower proportion of the fund is invested in Equities and the stable return from its debt component ensures that Balanced Mutual Funds does not suffer as much as pure Equity Funds when equity market declines.
4) Tax efficient as Equity Funds: Equities or Equity Mutual Funds enjoy significant tax advantage over other asset classes and this in turn helps in increasing the returns that you get from your investments.
Since Balanced Mutual Funds maintain 65% of their portfolio in equities at all times, they are taxed similar to equity mutual funds, i.e. Capital Gains are Tax free if units are sold after 365 days and 15% Capital Gains Tax is applicable if units are redeemed on or before 365 days of investment. Also, dividends in case of Balanced Mutual Funds are tax-free similar to Equity Mutual Funds.
The Bottom Line
Investing can (and should) be fun. It can be educational, informative and rewarding. By investing in Balanced Funds, you could not only manage risk and diversify your portfolio but also earn superior returns in the long term.
Happy Investing
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