Balanced funds shrink by 72% in five months to Rs 27 bn from Rs 100 bn

10% dividend distribution tax and instances of mis-selling to blame

Balanced schemes which dabble both in stocks and debentures are losing favour with investors. Inflows into these hybrid schemes stood at Rs 27 billion in May, down 72 per cent from the peak of Rs 100 billion seen in December 2017.

The May inflow tally isn’t one off. Flows into balanced funds have been coming off gradually this year. In April, they stood at Rs 35 billion, compared to Rs 68 billion in the preceding month. 

According to industry players, bulk of the investors in these schemes were from the retail segment. The imposition of a 10 per cent dividend distribution tax coupled with instances of mis-selling—where assured returns of 12 per cent per annum were being offered — have dimmed their appeal, they say.

Industry insiders suggest part of the reason that lured retail investors to these funds was that they were being marketed as a regular dividend-yielding product. “There was some mis-selling that happened in balanced fund category. They were being sold as products that can offer one per cent dividend yield every month,” says Mukesh Dedhia, director at Ghalla Bhansali Stock Brokers.  

According to Aashish Somaiyaa, MD and CEO at Motilal Oswal AMC, with monthly tax-free dividends being paid out, these funds were being portrayed as low-risk products, which was not the case.

Top official of a wealth advisory firm, who didn’t wish to be identified, said that in an environment where bond yields were hardening, it was not appropriate to assure a one per cent dividend yield on a monthly basis.

Experts say things have started to unravel for such products with price correction in both equity and debt markets this year. In the last six months, Nifty has given returns of a little more than one per cent and bond yields have hardened to eight per cent. Bond yields and prices move in opposite directions. 

In 2018, average returns given by balanced funds are marginally negative at 0.6 per cent.

In the current quarter, the average dividend yields of the balanced category have also slipped by 144 basis points. With the budget announcement in February that subjected equity-oriented funds to dividend distribution tax of 10 per cent on a par with debt funds, these funds also lost their tax advantage.

 

“Once the dividend distribution tax was introduced, dividend income further lost its allure and so did the dividend option that was generating interest in these schemes,” Somaiyaa says.

Balanced fund as a category had gained popularity post-demonetisation as these funds hit a sweet spot.

Between November 2016 and December 2017, market barometer Nifty clocked returns of 25 per cent. As a category, balanced funds gave returns of 23 per cent during 2017, with average dividend yield of 2.45 per cent, according to data from Value Research.  

In the three months following demonetisation, bond yields were up 17 bps, hovering close to seven per cent and by December 2017, the yields were comfortably above the seven per cent-mark with another 33 bps gain. 

When the debt component of the balanced funds came under pressure, the equity part had continued to deliver healthy returns. This year, both the asset classes have fared badly. However, some feel that with the bond markets pricing in the rate hikes, the debt component of the balanced funds could do well going ahead.