Arun Gopalan, Vice President (Research) of Systematix Shares & Stocks (I) Ltd says, “participation of the HNI and UHNI categories in the MFs is already on the ascendant, as significant amount of investment of the moneyed class has shifted from direct exposure to the mutual fund route, especially in the case of equities”.

In line with the healthy growth in assets under management worldwide, India mutual fund industry is witnessing steady growth in its assets under management for open ended funds. (An open-end fund is a type of mutual fund that does not have any restrictions on issuance of new shares. Majority of mutual funds are open ended which provide investors with a useful and convenient investing experience.)
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In fact, India is just behind China and Switzerland if we consider CAGR for the net assets of the regulated open ended funds when we consider period between 2008 and 2015, according to ICI Factbook. The net assets for open ended funds in India grew by 18 per cent per annum for a period between 2008 and 2015. The growth in assets has been phenomenal; much higher than the growth seen in the US and European markets.                     

However, India's share in global mutual fund assets stands at a mere 0.45 per cent with worldwide total net asset for regulated open ended funds being Rs 2479 lakh crore. This highlights the growth potential for the country’s mutual fund industry and the catching the Indian mutual fund industry has to do. Says Dinesh Rohira, Founder & CEO of finance.com, “mutual funds are gaining popularity amongst the investors due to its ability to deliver superior return as compared to major indices and active management of funds. Rising trend of investor’s education, adoption to technological platforms and improved sentiments have added to the overall AUM for the mutual fund houses. Looking at the inflows in SIPs, last three years have witnessed a growth of 12% CAGR in the overall volume of SIP applications increasing from 7 million to exceeding 10 million now.”

Why Balanced Funds?   

As an investor of mutual fund, with over 2000 odd primary mutual fund schemes to invest in, it is not easy to identify top performing mutual fund scheme which will aid in long term wealth creation. Identifying the right mutual fund product indeed is critical for long term wealth creation. But equally important is to adopt a scientific portfolio construction process, not only when it comes to building a direct equity portfolio but also while building a purposeful mutual fund portfolio. The ideal portfolio construction process should begin with an investor choosing an asset allocation strategy. An investor once done with strategy identification pertaining to the asset allocation strategy, should then implement the strategy based on his or her risk-and-return expectations.

We have seen increasing interest in mutual funds by Indian investors, no doubt, but there is a visible trend reflecting a lack of conviction amongst the Indian investors on the importance of asset allocation, especially when it comes to creating wealth in the long run. It is now a common knowledge to those in the investment advisory community – as to how important is strategic asset allocation, however general investors still remain unaware of one of the most important questions that can make the difference to one's portfolio i.e, “how does asset allocation affect one’s portfolio?”
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Without going into statistical details it is opportune to state at this point in time that the asset allocation policy decision should be the priority and the strategy used to implement it should be secondary.  In other words, it is more important to select and identify an appropriate asset allocation strategy than selecting the individual funds that can be used to implement the allocation. Practically speaking both the steps are important but in reality general investors have often missed the ever essential first step in the portfolio construction process of strategic asset allocation.
 
It is highly advisable to general investors that he or she should, while constructing a mutual fund portfolio give adequate weightage to asset allocation. Balanced Fund is one category of mutual fund that has asset allocation solution embedded in the fund itself. A Balanced Fund by its very basic operational nature provides tailor made asset allocation solution to the modern day investor need of diversifying into various asset viz., equity and debt. Gold as an asset class is missed out of Balanced Fund. A multi asset fund will usually have allocation in equity, debt and gold.

Says Gopalan, “There are good levels of interest in equity, debt and Balanced Funds from various classes of according to investment needs, signaling a remarkable improvement in maturity of investors and advisors alike. This is also helped further by the fact that at this point in time, both equity and debt, have delivered returns as per expectations and both asset classes are expected to remain strong during the next one year. However, we have observed a significant increase in the interest of investors towards Balanced Funds during recent months”

Indeed, top performing Balanced Funds have been able to perform equivalent to equity indices, also have been able to match performances of some of the equity diversified funds. Where the Balanced Fund score is in providing low variability in return while maintaining healthy returns. In other word, top quality Balanced Funds have been able to generate quality returns while successfully being able to minimise the returns.

We have identified top five Balanced Funds ideal for investments with a long term time frame in mind. The top five funds have been selected within the open ended, equity oriented Balanced Fund category. Only those funds with a minimum net asset size of Rs 1000 crore have been considered for the selection process. Apart from the net asset criterion, funds with minimum five years of track record have been considered. All the funds mentioned below have been able to outperform Sensex over 3 to 5 years and are essentially growth funds. Top five Balanced Funds selected in this cover story have also been featured amongst the top 10 funds as per Value research rating out of 28 funds in the category.
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HDFC Balanced Fund, L&T India Prudence Fund, Franklin India Balanced Fund, SBI Magnum Balanced Fund and Tata Balanced Fund- (Regular Plan) are the top five Balanced Funds which have been able to perform at par or better than the pure equity funds. The average returns delivered by these Balance Funds over a 5- year period on an annual basis are quite impressive being in the range of 15 to 20 per cent at par with the pure equity funds.

Conclusion :-

Noting the importance of strategic asset allocation and increasing volatility in equity markets adding Balanced Fund to the mutual fund portfolio could be the key to create wealth in long term. As far as picking the winning mutual fund goes, an investor should stick with those funds with lower expense ratios, lower portfolio turnover and funds with more assets under management for consistent out-performance.

It is also observed that participating in mutual fund by way of systematic investment plan (SIP) can help boost returns and help investors avoid market timing risk. Investors taking exposure to balanced fund should have a long term view in mind and additionally should be cautious while investing in an environment when the interest rates in economy are rising as both equity and debt security prices have tendency to trend lower in such an economic environment.

To summarise, following three steps are crucial when developing a smart purposeful mutual fund portfolio:-

1. Know your risk profile
2. Define investment policy with clear mention of strategic asset allocation required
3. Implement the asset allocation by picking up top mutual funds schemes which supports the broader strategy.
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What experts say about Balanced Fund :

 Arun Gopalan, Vice President, Research at Systematix Shares & Stocks (I) Ltd.

“The first point that needs to be understood is the significant tax advantage that Balanced Funds bring to the investors. Despite having upto 35% of their investments in Debt instruments, these funds are taxed as Equity Funds and are tax-free beyond 1 year. So they are more tax efficient than a combination of separate equity and debt funds. The second point is, by the very nature of their asset allocation, Balanced Funds gain lesser than equity funds and also lose lesser than equity funds. Over the long term, this advantage of losing lesser, enables the Balanced Funds to outperform plain vanilla equity funds. These points, along with increasing awareness of the importance of asset allocation have brought a long overdue popularity to the Balanced Funds.”


Dinesh Rohira, Founder & CEO, 5nance.com

Balanced Funds typically invest at least 65% of their corpus in equity and the rest in debt. It ensures a higher return from equity exposure and debt proportion gives it a stability. This balanced approach has managed to delivered better returns as compared to Nifty over a period of 3 and 5 years. Over last three years Balanced Funds have delivered 16% of CAGR beating category returns the returns of large cap funds. With upswing and continued positive sentiments in equity and debt segments, investor can set a return target of 14-16% from Balanced Funds keeping three years as investment horizon.

Understand your risk profile and arrive to an asset allocation for a long term sustainable portfolio.  If you are looking for equity-like returns in the long term, Balanced Funds have proven to deliver superior risk-adjusted returns and should have a place in your portfolio. Adjust the proportion of balance funds in the desired allocation and if you already have an overall portfolio allocation in place, ensure that the fund doesn’t distort the equity-debt equilibrium.
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The fund has a history of five years performance with the performance for last 4 years being phenomenal. The fund has not been tested for its performance in bear market and hence the investors need to factor in the fact that the fund has witnessed mostly the good years in the market with the worst period for the fund being between February 2015 to February 2016 with the returns being negative 7.65 per cent during the same period. The biggest draw down for the fund in a given single month has been at 10 per cent in the month of July ,2011 (27th July ,11 to 26th August,11). This indicates how the fund has performed in the bear markets.

The worst yearly performance has been recorded during between Feb 27- 15 to Feb 29-16 where the fund has generated negative 7.65 per cent returns.

The fund recorded its best performance during Feb 13 --14 to Feb 13--15 where the fund delivered 59.25 per cent.

Franklin India Balanced Fund

Franklin India Balanced fund is characteristically different from its peers covered in this report. The fund is a conservative Balanced Fund and the fund manager believes in taking lower risks. The fund has been able to generate excess risk adjusted returns over long term and hence has been one of the preferred balanced fund by investors. The net assets invested in the fund is `1016.10 crore. The fund's objective is to achieve long-term capital appreciation with stability of investment and current income by judiciously balancing between equity and debt investments. The fund has been a consistent performer and has outperformed its benchmark index by almost 6-9 percentage point over 3 to 5 year period. While recording its best performance over 1 year period the fund has delivered 90.23 per cent during 24th Apr-03 and 23rd Apr-04. The worst performance for the fund was recorded between 4th December-07 to 3^rd December-08 where the fund delivered a negative return of 41.39 per cent. In a single month the worst performance. 

HDFC Balanced Fund

HDFC Balanced Fund with assets well over `5700 crore has a rich history of performance spanning 10 years. The fund has exhibited excellent risk adjusted performance and seeks to generate capital appreciation with equity component and generate current income with it exposure to debt securities. Under normal circumstances, the scheme will take 60 per cent exposure to equity while 40 per cent being invested in debt instruments. However the fund manager has aggressively taken higher exposure taking in view the equity out-performance. The 10 year annualised returns for this balanced fund is 15.52 per cent which is comparable to a pure equity funds, thus this fund stands a winner with generating equal returns comparable returns to an equity fund with lower risks. Most importantly the fund has delivered returns over long run in-spite of facing two major downturns in the year 2008 and 2011. The fund performance in the bear market during the year 2008 , also its worst year has been negative 39.43 per cent ;between Jan 14--2008 and Jan 3-- 2009. In a single month the worst performance for the fund has been 25.59 per cent (26Sep 08- 27th Oct -08). The fund managed to deliver 100.65 per cent returns for period of 1 year during 9th March-09 and 11th March-10.

SBI Magnum Balanced Fund

SBI Balanced Fund with extremely rich track record has total assets under management of `4593.48 crore. It has been through bear markets and emerged as a consistent performer over past 4 years. The fund has allocated about 40 to 50 per cent of its debt portfolio to high yielding fixed income instruments. The fund has invested in mid cap stocks to boost the returns in its equity portion.

The fund has outperformed the benchmark since over 3 to 5 years by generating excess returns of 6-10 percentage points over the benchmark.

The best 1 year period for the fund has been between 24th of Feb-99 to 24th Feb-00 when the fund delivered 268.77 per cent returns. The worst period for the fund was seen between 9th March-00 to 9th March- 01. For any single month the worst performance for the fund has been during 31st March-00 to 2nd May-00 where the fund generated negative 41.61 per cent returns.

The fund with great track record aims to grow capital by investing in balanced portfolio of equity and debt instruments.

Tata Balanced Fund –Regular Plan

Tata Balanced Fund can be termed as one of the most consistent funds when it comes to returns and the predictability of returns is high for the said fund. The fund seeks to deliver steady returns by investing optimally in debt and equity instruments. The equity portion of the fund has exposure to 55 to 60 stocks from various capitalisation with a mid cap bias when compared to the category.

The fund has over a period of three to five years outperformed the benchmark by almost 7 to 10 percentage points.

The best 1 year period for the fund has been between 4th Jan-99 to 4th Jan-00 when the fund delivered 120.81 per cent returns. The worst 1 year period for the fund has been 14th Jan-08 to 13th Jan-09 where the fund has delivered negative 47.16 per cent.

For any single month, the fund has dropped maximum by 25.07 per cent during 24th Sep-08 to 24th Oct -08.