We Financial Planners always insist on asset allocation, which is optimum mix of different asset classes. Each of these asset classes are available for investment and we can make different recipes out of them, but in Mutual Fund we find a category of fund called the “Balanced Mutual Funds” or “hybrid equity oriented funds”, which are ready-made meals for asset allocation. Through this post, let’s try to understand the feasibility of investing in a balanced fund and why should an investor invest in a balanced fund? (You can also check which is Best Balanced Mutual Fund)
In life also we balance lot of things – the professional life and family life, rented house and own apartment, needs and wants etc. And, if you get a formula to balance any one of these, you will be thrilled. I recently read “8 hours sleep & rest, 8 hours recreation, family, friends and 8 hours of work. Tweak this rule and your life will tweak.”
Same way balanced mutual funds can also be helpful in balancing your portfolio & provide you higher returns. Investment in them can provide you certain benefits as mentioned below. If you feel you are facing these situations, balanced funds can really be a good solution.
Benefits of Balanced Mutual Funds
1. When you are not diversifying at all: Lot of investor put money as per the climate. When equities will do well they will draw cheques for equity investments only and when they suffer a loss the money is diverted to bank FDs. And when the market roars they grump and get premature withdrawals on FDs. This happens when person does not understand the nature of these asset classes. But point is “baseball cannot be played with a straight bat”. You need to be “with the assets” to gain from them. Either leave it on your financial planner or invest in balanced mutual funds. Let this worry of “investing in which asset class” pass on to the fund management. The experts are better bet for taking a decision on whether you should be over or under weight on equity or debt.
2. When you are investing for one goal or expenses: If you have a one goal or a funding requirement in long run investing in balanced fund can be a way out. One of my friend start a SIP for 5 years in a balanced mutual fund the day he buys a new car. The proceeds of this SIP are used as down payment for the next car. Similarly if you have a goal which is long term in nature and you need to accumulate a corpus over a period of time, instead of the regular RD or timing the market it is good to invest through a balanced fund. By this you will be able to diversify and allocate asset for isolated investments.
3. When you are looking for smooth landing: Investing in equity is a bumpy ride but for best return in long term you need to be friends with equity. But investing in equity needs a sound heart and patience. If you feel you cannot cope with the volatility still wish to have better returns than debt you can choose balanced funds. The returns will not be as spicy that of equity diversified fund but you will get a good deal. Also when you compare these returns on the risk-adjustment parameter, balanced fund will give you more returns on the risk taken by you. (Read Understanding Mutual Fund with Different Perspective)
Few Limitations of Balanced Mutual Funds
1. Minimum 65% in equity: Fund Managers have limited freedom as 65% is the minimum requirement to take benefits of taxation. So in case even if fund manager feels that minimum equity exposure is beneficial for the portfolio he cannot do it beyond 51%. (Read: Mutual Fund Taxation in India) So if you thought balanced means 50:50 or anything else – this is now part of mutual fund history.
2. Partial withdrawal: That’s a big problem with balanced funds – think of a situation when you need some amount for your emergency need but you have parked your whole amount in balanced funds. As you don’t have any choice you will redeem from balanced funds & that mean for every redemption of Rs 100 you are actually redeeming Rs 65 from equity & Rs 35 from debt. Even if you are long term investor in equity, automatically your equity gets redeemed. In case of proper asset allocation you could have avoided this thing.
3. Limited Choices: If you want to have exposure to midcaps or only large caps, this is not possible with balanced funds as you can’t dictate your terms to fund managers.
Best Balanced Mutual Funds in India
You can check performance of top balanced mutual funds.
Balanced Mutual Funds
|HDFC Balanced Fund||8.62||35.17||14.99||18.14|
|Reliance Regular Savings Balanced||2.86||32.90||14.81|
|Canara Robeco Balance Fund||5.77||30.29||12.03||20.15|
|Tata Balanced Fund||6.47||29.58||12.44||20.03|
|Birla Sun Life 95||-3.62||27.68||11.35||19.60|
|ICICI Prudential Balanced Fund||8.70||26.19||8.12||17.66|
|DSP BlackRock Balanced Fund||2.99||25.04||12.37||20.56|
|UTI Balanced Fund||-0.88||24.39||8.57||15.54|
|Franklin Templeton FT India Balanced||2.78||22.85||9.14||17.84|
Also Check – Best Mutual Funds to Invest
HDFC Prudence Fund – the Ultimate Fund
If we are talking about balanced mutual funds & not talk about HDFC Prudence Fund – it’s like a DAY without SUN. This fund is a gem offering of Mr Prashant Jain – he is managing this fund since 1994 (since inception). I worked for HDFC Mutual Fund & got couple of chance to interact with Mr Prashant Jain – he used to say “I never changed my company. Once the private Mutual Fund opened in 1994 I started with 20th Century Mutual Fund, they sold it to Zurich & finally HDFC bought them.” That’s a big commitment from a Fund Manager, where these days’ people change their jobs like shirts.
Below you can check 3 year rolling chart of HDFC Prudence fund – if someone had invested for 3 years in this fund, he always got positive returns.
If you compare HDFC Prudence with its category – it has outperformed the category in every single period. Even it has outperformed Sensex by wide margin baring period ending 2007. This is magic of Asset Allocation.
Planning for investments is not a fixed solution concept. We have to arrive at an investment mix by checking on various ingredients and readymade concepts. Balanced fund is such concept. (Read: How to set Financial Goals)
I have given you enough reasons why you should or why you should not invest in a balance fund. Hope this will clarify what you are looking for in a Balanced Mutual Funds. Share your views & questions in the comment section.