Balanced funds add value to investors' portfolio

In the spectrum of funds available to investors, balanced funds sit somewhere in the middle of the range. While at the conservative end, there are the fixed income funds in the ultra-short and the short-term funds category, at the other end we have equity funds - diversified flexicap equity funds, mid cap funds etc, which an investor may invest in.

The balanced funds make sense for investors from either end of the spectrum. For the investor who has been a conservative investor and would like to gradually increase exposure to equity, balanced funds fit well.

Balanced funds would give such an investor equity exposure while also keeping a reasonable exposure to fixed income. While the investor can achieve the same asset allocation by investing in two separate equity and debt funds, the balanced fund route will ensure that the investor keeps his/her asset allocation intact without any action on the investor’s part.

Further, if the investor were to rebalance the asset allocation in the case of having invested in separate funds, it could be a taxable event depending on the period of holding. This would not be the case if the investor had invested in the balanced fund as the re-balancing actions by the fund manager does not lead to tax applicability in the hands of investor. 

At the other end of the spectrum, either for the existing investor who is more exposed to equity in his/her portfolio and would like to bring down the risk in the portfolio while maintaining an equity exposure, or for a new investor who wants to enter equity markets but does not want to fully commit if he/she believes the markets to be expensive, balanced funds offer an attractive option. The debt portion of the portfolio brings relative stability to the portfolio and provides a cushion during market volatility.

Of course, the flip side to balanced funds is that in a rising market, they will underperform a pure equity fund as they have a lower equity component. However, in a choppy or a volatile market, since they will fall lesser than a pure equity fund when the market is falling, the gap between their performance and that of an equity fund may not be very substantial even if the market has been up overall.

Since the markets do not usually advance in a straight line, moving rather in ups and downs, the returns from balanced funds compare reasonably well with those from diversified equity funds. As an example, as of July 31, 2017, the median return (CAGR) of a set of balanced funds for the past three years was 16.37%, while the median return of a set of diversified equity funds for the same period was 17.49% which is not too different, especially given the lower risk taken by balanced funds.

Since over the long term, India is expected to be a growth market, the pure equity funds should do better than balanced funds, but balanced funds cover a fair number of needs of an investor. Further, an investor can always use the Regular Withdrawal Plan in a balanced fund to plan for his periodical cash flows using the fact that balanced funds are relatively more stable. Balanced funds add value to an investor’s portfolio by way of inherent risk management and disciplined rebalancing to be within the range, combined with tax efficiency, while taking steady exposure to equity markets.

 (The writer is Chief Investment Officer, Principal Pnb Asset Management Company. Views expressed are the author’s own and for informative purpose only.)