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The current volatility in the equity markets can be a cause of concern for retail investors, who have made a gradual comeback to equities. In a scenario where the benchmark Sensex gains by 200 points one day, only to fall sharply the next day, balanced or hybrid funds can seem a good option. Since these invest a portion of their assets under management in debt instruments, they provide an automatic cushion from any fall in the equity markets. But remember that if such funds fall lesser than, say, a large-cap equity fund during a volatile market, they will not give as much returns as equity funds when market rise. But for those with a horizon of three-to-five years, these can be a good option.
“Currently, we are in a more volatile market. So, there is an opportunity for balanced funds to give a defensive experience. While we are firm believers in equity in the long run, it is unlikely the markets will give similar returns to what was seen between September 2013 and February 2015. So, balanced funds are attractive,” says S Naren, chief of investment at ICICI Prudential AMC.
A high return from the market is possible only if there is acceleration in corporate earnings, capex growth and industrial revival. Until then, they will continue to be volatile, he adds.
According to data from Value Research, the one-year category average returns of equity-oriented hybrid funds have been 33.72 per cent, higher than large-cap equity funds, which saw returns of 29.36 per cent. On a three-year basis too, the returns from equity-oriented hybrid funds have been marginally higher at 19.83 per cent, compared to 19.22 per cent from large-cap equity funds. Even on a five-year basis, the performance of equity-oriented hybrid funds are higher at 12.61 per cent, against large-cap equity which offers 11.20 per cent.
A recent report by CRISIL says, “Balanced funds held sway over Monthly Income Plans (MIP), debt and even large-cap equity peers last fiscal, riding on interest rate cuts and continued firmness in equities. These funds typically invest over 65 per cent of their corpus in equity and the remaining in debt and cash, which allows them to tap run-ups in either category.”
While equity funds are always advisable for long-term investment, those investors who have a time frame of three-to-five years can look at balanced funds, says Hemant Rustagi, chief executive officer (CEO), Wiseinvest Advisors.
“Investors who are only starting investing in equity markets, can start with debt-oriented balanced funds, then move to equity-oriented balanced funds and then move to equity funds. Similarly, if you cannot decide how much to allocate between equity and debt, you can look at balanced funds because the fund manager is doing that for you,” he adds.
It is not only retail and first-time investors, but high net worth individuals (HNIs), too, who are increasingly investing in balanced funds. According to data with the Association of Mutual Fund India (Amfi), the share of HNIs in the balanced funds category has increased to 3.46 per cent as on March 31, up from 2.97 per cent as on December 31, 2014. HNIs are defined as individuals investing Rs 5 lakh and above.
“HNIs are investing in balanced funds because of the tax exemption, which puts them at an advantage as compared to debt funds,” says Rajesh Saluja, CEO and managing director of ASK Wealth Advisors.
Equity-oriented hybrid funds, which invest up to 65 per cent in equities, get the same tax treatment as equity funds, which means they are tax-free after one year. Against this, debt funds are eligible for long-term capital gains only after three years. If they are redeemed earlier, they get taxed as per the income-tax slab.
Balanced funds will gain when interest rates fall because of their exposure to debt instruments. Equity is also expected to do well because companies’ earnings will improve when interest rates fall. So, balanced funds will benefit from gains in both the equity and debt markets, says Rustagi.
