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Balanced funds: Are they balanced?
Although creation of new categories of balanced funds is designed to provide more options to investors, it may also be confusing
No two investors are the same. Individual beliefs and aspirations are influenced by previous environment and experiences; and different mutual funds are designed for investors with different risk appetites. Equity mutual funds, investing mainly in equities or stocks, are designed for aggressive investors with high risk appetites, with the riskiness of the fund increasing with the choice of equities in the portfolio allocation. Aggressive investors place a premium on growth of their money, and hence, prefer asset classes that might be relatively riskier or volatile but which offer better potential returns like direct equity trading, forex, commodity and derivative training and mutual funds like equity, growth or sectoral funds. Stocks generally have different betas; higher than the market, similar to market or lower than the market. Equities with high beta and covariance would have an upward movement more than the stock market during a bull run but, on the other hand, would fall more than the market during the market downswing. Stocks with betas similar to market will give returns equivalent to it.
On the other hand, conservative investors with low risk appetite, prefer to have a measured approach to saving, which means that they search out ‘safe’ avenues for their money, where there is some amount of assured growth or income, like Government-issued bonds; Government saving schemes like public provident fund, post office schemes, bank fixed deposits, and in the area of mutual funds, money market funds or liquid funds, which invest in very short-term, liquid instruments like treasury bills, commercial paper and certificates of deposits (CD). A medium-risk investor lies somewhere between these two and although willing to take some amount of risk, takes adequate capital protection measures and invests in avenues like corporate bonds and balanced funds, that invest in both equities and debt.
For a normal investor who wants a capital protection in addition to a reasonable return on his/her investment, investing in balanced fund is a good way to start mutual fund investing. Balanced funds generally invest 60 per cent of their funds in equities and remaining 40 per cent in debt. But in practice, are the balanced funds really “balanced”? It has been seen that some fund managers invest up to 75 per cent in equities, with the balance 25 per cent in debt, which makes the fund similar to an equity fund with similar risks and defeats the purpose for which they were created. Let us see the equity allocation of the top five balanced funds in India.
Both Tata Balanced Fund and Aditya Birla Balanced Fund have allocations to equities to the tune of 73 per cent and 76 per cent respectively, which make them quite risky for any moderate investor. Similarly, HDFC Balanced Fund and Franklin India Balanced Fund also have equities to the higher side at 67 per cent and 66 per cent respectively. ICICI Prudential Balanced Fund has the lowest equity allocation among the five top balanced mutual funds at about 63 per cent. There are several reasons why fund managers have higher allocation in equity funds. After the introduction of dividend distribution tax (DDT) in the Budget by Finance Minister Arun Jaitley, there has been lot less interest in balanced funds as investors used to invest in these hybrid funds for dividends, and DDT ate into the dividends-in-hand for the investors. In case of any market volatility, the dividends can go much lower. This has created a pressure on fund managers to generate higher returns and, therefore, more equity allocation.
Due to deviation in the required asset allocation of balanced funds and keeping investor welfare in mind, Securities and Exchange Board of India (SEBI) has recently proposed to change the name of the balanced fund into three categories — aggressive hybrid fund, balanced hybrid fund and conservative hybrid fund. The aggressive hybrid fund is a fund that invests in equities and equity-related instruments between 65 per cent and 80 per cent of total assets and debt instruments between 20 per cent and 35 per cent of total assets. Accordingly, Tata Balanced Fund and Aditya Birla Sun Life Balanced Fund are now rechristened as Tata Hybrid Equity Fund and Aditya Birla Sun Life Equity Hybrid ’95 Fund respectively. The balanced hybrid fund invests in equities and equity-related instruments between 40 per cent and 60 per cent of total assets and debt instruments between 40 per cent and 60 per cent of total assets. The conservative hybrid fund invests 10 per cent to 25 per cent of overall assets in equities and its related instrument and debt instruments between 75 per cent and 90 per cent of total assets. Investors can invest further into other hybrid funds like arbitrage fund, dynamic asset allocation fund and multi-asset allocation funds.
New nomenclature of balanced funds into different hybrid funds are aimed to provide new lease of clarity to investors while selecting any balanced fund for their investment. However, with the introduction of aggressive hybrid fund, the difference from traditional equity funds seems to be fading. Although the creation of new categories of balanced funds is designed to provide more options to investors, it may also be a source of confusion.
(The writer is Assistant Professor, Amity University)
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