Balanced funds are for those who do not want to lock all their money in equity or debt.
With both interest rates and stock markets on the rise, investors have many choices. Fixed deposits are offering annualised returns of six-seven per cent, fixed maturity plans of mutual funds over eight per cent, and if one wishes to increase the allocation to his/her employees’ provident fund, the returns can be as high as 9.5 per cent this year.
The BSE Sensex has again breached the 20,000-mark and is going strong. Under such circumstances, when there is plenty of confusion about allocating assets, balanced funds can be a good bet. Says Sanjay Sinha, CEO, L&T Mutual Fund, “Balanced funds are good for investors who do not intend to lock their entire money either in equity or in debt.”
| THE FINE PRINT |
| Equity Balanced Funds |
| Investment: 65 per cent in equities, |
| 35 per cent in debt |
| Tax treatment: Short-term capital gains @15 per cent, long-term capital gains |
| @ 0 per cent |
| Annual returns: 21.60 per cent (as of September 27) |
| Debt Balanced Funds |
| Investment: 75 per cent in debt, |
| 25 per cent in equities |
| Tax treatment: Short-term capital gains added to income, and taxed as per slab. Long-term capital gains - 10 per cent with indexation, 20 per cent without indexation |
| Annual returns: 11.37 per cent (as of September 27) |
Data from Value Research, a mutual fund rating agency, show that equity-oriented balanced funds have returned 22 per cent in the last one year ending September 27. The Sensex returned 19.45 per cent in the period. Balanced funds invest 65 per cent of the corpus in equities and the rest in debt. Consequently, these are able to contain downside and are more stable in a falling market.
After the 2008 market slowdown, a large number of equity investors moved to these schemes to protect the downside. For instance, if equity markets correct 50 per cent, a scheme with 100 per cent allocation could fall in tandem or more, depending on the fund manager’s calls. On the other hand, equity-oriented balanced funds with a 35 per cent debt cushion safeguard gains.
Mahesh Patil, head-equity (domestic assets), Birla SunLife Mutual Fund, says, “Inflows into balanced funds increased when the markets were volatile. These funds did well then.”
Although it is not a cheap market, the outlook for both markets and interest rates is positive for the next six months to one year, say experts, adding that can invest in these schemes at present. “From a risk-return perspective, there is a strong case for balanced funds in the current market,” adds Patil.
Obviously, it does not make sense to keep all your savings in balanced funds. At best, keep up to 20 per cent of your portfolio in these funds as they help keep your portfolio balanced and tweak your allocation in tune with the market movement. There are debt-oriented balanced funds as well. These invest 75 per cent in debt instruments and the rest in equities. Given the expectation that interest rates may rise further, does it make sense to invest in these funds?
Market experts say one may follow this strategy, but only for the short term. “As equity has some risks at the current levels, investors may look at medium-term debt funds for six months, not beyond that. Inflation is likely to ebb by March, which will see interest rates and yields falling,” says Mukesh Dedhia, director, Ghalla and Bhansali.
Also, there is a tax advantage. Balanced funds that have two-thirds of the money in stocks are treated as equity funds. This means a 15 per cent tax on short-term capital gains (less than a year) and zero tax on long-term capital gains (over one year).
Debt-oriented balanced funds are taxed as debt funds. Short-term capital gains are added to the income and taxed according to the applicable tax slab. But long-term capital gains get inflation indexation benefits. The tax rate is 10 per cent with indexation and 20 per cent without indexation.
