Balanced funds generally refers to the hybrid equity-oriented mutual fund scheme where, you usually invest 65-75% of the portfolio in equity securities and remaining portion gets secured in the money market securities or debts. This hybrid portfolio maintains a moderate fund volatility which enables potential wealth creation during long term. However, as the major part of it is parked in equity, the funds experience equity taxation. Thus, it is largely recommended to the first time investors and to the extremely conservative equity lovers. Yet, the hyped up popularity of these funds, is now experiencing exceptional withdrawals as they have become riskier lately.
What actually is the problem with balanced funds?
Over the past few years, balanced funds turned out as a fantasy to investors. Fund houses, bankers, agents, and the brokers have been selling these funds to the investors. However, as the market is consistently rising, despite the higher valuations, the fund managers handling balanced ones took higher equity exposure, this too in mid capes despite of the higher valuation conditions. Ideally, this must be the other way round, where reduction of equity exposure must be experienced. Despite the fact that market is largely valued with Nifty, P/E nearing to all time high of 25+, we are still facing greater exposure to equity funds.
Thus, all of a sudden, these balanced funds turned as risky, and specifically for investors with moderate risk appetite. This is because the fund managers are extracting higher equity exposure while some of them are simultaneously betting over the long term debt instruments, even when interest rates are holding up. thus, the higher exposure to equity, in the event of mid cap stocks and longer holding duration of bonds are making the balanced funds a riskier alternative.
What about the debt part of balanced funds?
The debt portion, even lesser, but is significantly supposed to lessen down the equity market volatility. However, it too has raised the volatility for certain funds. The fall in debt market, is due to the concerns regarding fiscal deficit and the depreciation of rupee which largely hurt the debt funds. Most of the long term and even the medium ones fell by 0.2-0.6% in recent times.
So what should one focus on?
If we pen down the certain essential points, then it is a clear fact that balanced funds are where you must park your money for longer term durations like that of 5 years, And not in short or medium terms. This is because one bad year and completely sink the returns like those in 1-3 years. As it is a high risk product, individuals have to invest slowly either through SIP (Systematic investment plan) or through (STP) Systematic transfer plan. Balanced funds are not the ones meant for regular dividends. Even the advisers who push these as low risk product are harming the interest of clients.
If you wish to avoid risk while investing in the balanced funds, then go with the ones where equity exposure is just somewhere close to 65%. As the major purpose here is to lessen down the risk, investors shouldn't opt for large cap based balanced funds, and they must avoid those schemes with excessive exposure to the midcaps.
Also have an eye on the debt side and ensure that fund managers aren't playing aggressively with bets. Certain fund houses provide two kinds of balanced funds, and both of them are managed differently. Here, one is aggressive and another one is conservative. So, ultimately, funds which take high risk on both equity and debt would be bad for the investors and it's better to avoid them.