Balanced funds may not be balanced
The balanced funds are being promoted by many distributors and fund houses as a low-risk product. It is ideally suited for investors new to the mutual fund investment and is risk aversive. The reason for such perception about the balanced fund is due to the presence of both debt and equity in the fund portfolio. Equity part of the fund provides the growth opportunities, while the presence of debt ensures that the downside is capped which gives stability to the fund's performance. Equity-oriented balanced funds are considered to be less volatile compared to a pure equity oriented fund, especially mid or small-cap dedicated funds.
No wonder, investors have been flocking to these schemes. From assets under management (AUM) of Rs. 62,907 crore at the end of November 2016, these funds now (at the end of November 2017) manage assets worth Rs. 1,55,105 crore, a 2.5 time increase. They now form 7 per cent of total AUM against 4 per cent year ago.
Nevertheless, recent studies show that some of these funds too are volatile and are not a low-risk product as being promoted. In order to generate better returns, these funds have increased their exposure to equities and no longer can they be termed as balanced. For example, UTI CCP Advantage Fund has 93.28 per cent of equity as per cent of total AUM. In last one year, many of the balanced funds have allocated more than 70 per cent of the AUM to equity against the minimum of 65 per cent. Another source of volatility is from the allocation of equity part to small and mid-cap companies, which are more volatile compared to large-cap companies. Some of the schemes have also allocated more funds to cyclical sectors instead of defensive sectors hence, adding another layer of volatility.
The debt part of the fund that is supposed to give the much-required stability to the fund performance has also been a source of volatility, recently. The recent increase in inflation and hike of the interest rate by US Fed has adversely impacted the performance of debt part of the fund. It has impacted most to the medium and long-term gilt funds. Hence debt investments made by these funds in long-duration bonds have made matters worse for these schemes.
Therefore, if you truly want to invest in balanced funds, you should go for those equity-oriented balanced funds that have more exposure to large-cap stocks under their equity portfolio and have not deviated much from the 65 per cent exposure to equity. Under debt part, you should check that they have more exposure to lower duration debts as they are less volatile currently.