Here are the Best Balanced Funds for the year 2017:
Balanced funds, also known as Hybrid Funds, are medium-term investments. It ultimately gives adequate exposure to stocks. But at the same time, it limits the market risk via substantial investment in debt securities as well.
The investment objective of Balanced Funds is to allocate assets in a specific debt-equity ratio. Based on the quantum of debt-equity allocation, these have been classified as equity-oriented or debt-oriented.
Those balanced funds which allocate more than 65% to equity stocks are known as equity-oriented balanced funds. Those balanced funds which allocate more than 65% to debt securities are known as debt-oriented balanced funds.
The Risk-Return Continuum
On a risk-return continuum, comparing equity funds to balanced funds provides surprising insights.
As regards risk, balanced funds have a lower standard deviation (SD) than equity funds. The equity funds can have an SD of as high as 20%. The SD of balanced funds can be as low as 7%. It shows the extent to which your actual returns may deviate from the average returns.
Compared to pure equity funds, balanced funds have shielded investors in a better manner. It becomes crucial especially at the time of stock market exuberance. You may recall the volatility which the stock markets exhibited during the crisis of 2008 & 2011. Balanced funds lost much less value than pure equity funds.
On returns count, however, you earn lower returns in balanced funds vis-à-vis equity funds. After the crisis ended and when markets recovered in 2009, equity funds outperformed balanced funds. It shows that during a market rally, balanced funds may not beat the benchmark to give you sky-high returns.
Hence, for moderate risk seekers having an investment horizon of 5-7 years, balanced funds have acted as saviours.
Also read: Best gilt funds for 2017
Ideal Asset Allocation
Asset Allocation of a mutual fund weighs heavily upon its risk-return profile. By investing in balanced funds, you need not buy equity and debt funds separately.
In mutual fund investments, rebalancing assumes critical importance. In this, you regularly monitor your portfolio to ensure that asset allocations match your targets. It is an essential part of your overall asset allocation strategy. You may increase or decrease the existing asset proportions to fit your requirements. The primary motive behind portfolio rebalancing is to keep the risk profile of your portfolio intact.
In the case of balanced funds, you are freed from worries of rebalancing the portfolio. The fund manager ensures that asset allocation always matches the scheme’s targeted allocation. He will book profits in assets that are performing well. Those funds will be reinvested to revive assets that are lagging behind. Overall, he tries to keep the portfolio composition intact.
The minimum equity allocation is 65% in case of equity-oriented balanced funds. But this doesn’t mean that it can’t go higher. It varies according to investment style of particular fund. Some fund managers may maintain equity allocation at a pre-decided level. Conversely, other fund managers may keep adjusting to take advantage of changing the market conditions.
For example Tata Retirement Savings Fund – Moderate Plan has been one of the top performing balanced funds. It allocates around 77% to stocks, 4.7% to bonds and rest to cash. Similarly, L&T India Prudence Fund, yet another top performer, invests 72% in stocks & 20% in bonds.
Within stocks allocation, you may look at allocation across market capitalisation. The larger the allocation to giant & large-cap stocks, more stable would be the returns in times of volatility.
For example, Tata Retirement Savings Fund allocates 20.85% in giant caps, while L&T India Prudence Fund allocates 34.92% in the giant caps. You may hence judge the overall stability and consistency of returns.
Credit Quality & Average Maturity
In the case of debt-oriented balanced funds, the credit quality of securities and average maturity becomes critical determinants of risk.
Credit quality is assessed using credit rating of securities. The higher the fund’s allocation to AAA-rated securities, the lesser is the probability of default.
For example, Birla Sun Life MIP II is one of the top performing debt-oriented balanced funds. Its 77.6% bonds are of AAA-rated & 20.73% of AA-rated category. Similarly, Franklin India Life Stage Fund of Funds 30s has 52% bonds of A-rated & 35.73% bonds of the AA-rated category. Hence, you may find that latter fund is riskier than the former.
Average Effective Maturity (AEM) of the securities is yet another important consideration. It means the length of time for which your money remains invested in a security. The higher the average maturity of a fund, the higher is its returns susceptible to interest rate fluctuations. And consequently, higher would be the risk of investment.
For example, The AEM of Franklin India Life Stage Fund of Funds 30s is 2.55 years. Conversely, the AEM of UTI CCP Balanced Fund is 4.17 years. Relatively, latter has got higher interest rate sensitivity than the former fund.
Apart from the things mentioned above, you may also examine other factors. You may look for fund having higher Sharpe ratio for better risk-adjusted returns. Similarly, seek funds with higher alpha to earn higher excess returns over the benchmark.
Following table exhibits season’s top picks for your reference:
Investment in equity-oriented balanced fund carries different tax implication than debt-oriented balanced funds. If you hold the equity-oriented balanced fund for more than one year, the capital gains become tax-free. The short-term capital gains are taxed at 15% plus cess.
If you hold the debt-oriented balanced fund for more than 3 years, you get indexation benefit. The long-term capital gains are taxed at 20% plus cess. Conversely, the short-term capital gains form part of your taxable income. These will be taxed as per your income slab.
Mutual Funds are subject to market risks. Please consult your financial advisor before investing.