Balanced funds gain currency

With spike in volatility, savvy investors opt for schemes with a mix of debt & equity to beat the market

With fixed-income returns bettering those of stocks this year, balanced funds offered by mutual fund (MF) houses are gaining traction among investors.

This category of funds, that invest up to 40 per cent in debt and the rest in equities, are considered ideal for those seeking extra risk cover during heightened volatility as seen this year. The BSE exchange's benchmark Sensex gained as much as 10 per cent in the initial months of 2015 and later fell 17 per cent from its peak. The Sensex is down about six per cent this year, while fixed-income has generated a return of around eight per cent.

Not surprisingly, investors have flocked to balanced schemes, which have seen their assets under management (AUM) soar a little over 40 per cent since April. Net inflows into these, at Rs 12,241 crore so far this financial year, are already 25 per cent more as compared to the Rs 9,826 crore in all of 2014-15. If the momentum continues, flows into balanced schemes this year could be a record, say observers.

The investor count in balanced funds was a little less than two million at the end of March. The category added 260,000 investors between April and October, taking the total investor base to 2.25 million.

“We recommend defensive equity investing with products, in the balanced and dynamic asset allocation category as suitable ways to ride the volatility. These funds invest in equities when the markets are cheap and book profits when the markets are rising, limiting risk and aiming to provide good returns,” said S Naren, chief investment officer at ICICI Prudential MF.

In the past year, debt funds across the category have offered returns of 7.5 to 8.5 per cent. Funds which are hybrid in nature, with equity orientation, provided returns of 4.1 per cent. Those with aggressive debt orientation returned a little over six per cent. In contrast, returns from large-cap category equity funds and multi-cap equity funds are in negative territory.

In this environment, fund managers say, balanced funds are the way ahead. They add the correction in the market is due to factors such as earnings falling short of expectations and worries on growth. “We continue to believe a correction is an opportunity to invest. This phase does not affect the long-term compelling case for Indian equities, with a moderated return expectation,” says Naren.

Further, the AUM of balanced funds has seen a big jump of 43 per cent so far in FY16, to Rs 37,682 crore against Rs 26,368 crore in March. The pace of growth of their assets surpassed those of pure-play equity funds, which grew only 15 per cent during the period.

This clearly indicates the preference for balanced funds is on the rise among investors, at a time when the stock market has been under pressure for nearly three quarters. With no visible growth in corporate earnings and new domestic and global concerns, fund managers believe recovery might not be as fast as was earlier anticipated.

Currently, the MF sector offers 26 balanced funds. These include ICICI Prudential Balanced Fund, ICICI Prudential Balanced Advantage Fund, HDFC Balanced Fund, HDFC Prudence Fund, Franklin India Balanced Fund and SBI Magnum Balanced Fund.

Balanced funds

These are mutual fund schemes with a component of debt and of equity in their portfolios. Fund managers are free to keep a mix of both. Typically, balanced (also known as hybrid) funds tend to keep 60 per cent of their money in equities and the rest in debt. These are geared toward investors who look for a mix of safety, income and modest capital appreciation. The amounts such an MF invests into each asset class must usually remain within a set minimum and maximum. Such funds tend to reduce the risk when stock markets crash or are volatile. Currently, there are 26 funds in this category, managing assets worth Rs 37,682 crore.