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Balanced Funds

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Hi All! Good Afternoon!

Let us discuss about Hybrid funds or Balanced funds.

We said, a Hybrid fund is usually has a mix of one of more of equity, debt and gold.

Hybrid funds are for those who want a bit of safety and return.

That is why, we said, Hybrid funds fall between Debt funds and Equity funds.

Among such funds, we discussed about how Monthly Income Plans or MIP can be used to get regular income.

We said, MIP schemes are good to meet recurring expenses such as monthly house-hold expenses, secondary pension etc.

For instance, i can build a fund that serves for my lifetime needs of paying the apartment association membership fee, fuel, electricity etc

It is just a matter of earmarking some amount and invest to generate income automatically for recurring expenses.

I also told u not to invest too much into these schemes. Only to the extent of getting dividend to the tune of 1.5x your monthly expense needs.

Even if you have not invested and got these dividends, you are already paying for these from your pocket, by way of salaries or business income

What i suggested is an automated approach so as to get tax free dividends and yet meet your expense obligations.

We discussed about two approaches to reach these goals:

1. Start slow and get increased dividend month after month as we accumulate units

2. Invest in an equity scheme to build a corpus and then switch the funds to MIP scheme to get monthly dividend.

MIP schemes are debt funds and hence might not be that tax efficient.

So, here comes Balanced schemes that addresses the risk and return between equity and debt securities.

What are Balanced / Hybrid Funds?

In today's class, we shall continue our discussion on the topic.

We shall discuss about Balanced Funds today

Balanced Funds are very popular schemes.

This is because, they can be invested in all market conditions.

These schemes are generally promoted when stock markets are generally at peaks.

This is because when stock markets are expensive, no one will invest in equities at the high prices.

Balanced schemes are good to invest when you are looking for low risk and moderate returns.

i.e These schemes are for moderate risk takers.

When we invest in a Balanced scheme, the fund manager will use our funds to invest in both equity and debt securities.

So, investors will be able to get the best of both the worlds at the same time.

These are good schemes if you do not want to invest all 100% of your money into equities or whole 100% into debt.

The fund manager will rebalance the fund depending on the market opportunities.

i.e fund manager will shift from equities to debt or vice-versa depending on the market conditions.

This is why we do not need to time the market when investing in balanced schemes.

In general Balanced funds give returns ranging from 10% to 15% depending on the type.

Now, lets check the various types of balanced schemes.

Types of Balanced Funds

There are two types of Balanced Funds

1. Equity-oriented Balanced Funds

2. Debt-oriented Balanced Funds

Equity-oriented Balanced Funds

Equity-oriented Balanced Funds will have substantial portion of the investment put into equity securities.

For instance, if a balanced scheme has 65% of money into equities, the remaining 35% will be put into debt securities.

Because of the higher equity allocation, these schemes are, in a way, wealth creators.

Of course, given a long time frame, pure equity schemes perform way better than a balanced fund.

But if you see, because 65% of the corpus is invested in equities in these equity balanced funds, these are treated as equity schemes for the purpose of taxation.

So, the returns from the schemes will have tax efficiency in the form of tax free gain under long term capital gains if held for a period of over one year.

Hence, they are tax efficient even when you are enjoying some debt investment part.

Debt-oriented Balanced Funds

Now let us go to Debt-oriented Balanced Funds

As the name suggests, Debt-oriented Balanced Funds will have substantial portion in debt instruments.

These are safer instruments over equities because a large amount of portion is invested in debt securities.

And because only a minority portion is put into equities, over long term, these instruments give returns that are more than the usual pure-debt funds.

The taxation treatment will be same as that of debt funds though.

Overlong term, these give higher return than the usual bank fixed deposits.

So, if you have some money you wanted to put in a fixed deposit for say 5 years, a debt-oriented balanced fund would be a better option.

For example, if i have some money to save for my child's Engineering / Medicine admission and want to go through investment route, this might be the best type of scheme.

Always remember that Mutual funds are Investments and hence have market risks.

There is no guarantee for returns.

We only anticipate them to do better than traditional savings because MFs are market linked and are professionally managed.

In general, these debt hybrid funds are good options if your investment horizon is 1 to 3 years.

They can perform better than the typical pure-debt funds during the 1 to 3 year period range.

So, these are the preferred instruments to invest when you have shorter time horizons or just few years remaining to reach your financial goal.

Tax implications on Balanced Funds

As we know, dividends from mutual funds are tax free in the hands of investors.

So, dividends that we get from Balanced mutual funds are also tax free.

We know that there are two types of balanced funds:

1. Equity-oriented balanced funds

2. Debt-oriented balanced funds

Tax on Equity-oriented balanced funds

Tax on gains from equity-oriented balanced funds is same as that of gains from equity mutual funds.

Hence, they are tax-free if the holding period is more than one-year (long-term capital gains).

If redeemed within one-year, the gains are taxed at 15% (short-term capital gains).

Tax on Debt-oriented balanced funds

Tax on gains from debt-oriented balanced funds are same as that of gains from debt mutual funds.

Hence, they are taxable at 20% with indexation benefit if held for a period of more than 3-years.

If held for less than three-years, the short term capital gains tax is as per the tax-slab of individuals.

Question

How to calculate investment required for a balanced fund to get Rs. 10000 monthly dividend?

One query about calculation of investment into hybrid funds if expense is 10000 per month then expected rate of return?

To be safe, assume MIP plans give only 10% return per year.

Use a calculator such as https://www.bajajfinserv.in/investment/mutual-funds/lumpsum-calculator.aspx to determine how much you need to invest.

Are Balanced Funds essential for a mutual fund portfolio?

I have no balanced fund in my portfolio it should be included?

It is not mandatory to have a balanced fund. It depends on your financial goal and risk you can take.

For instance, if you have some financial need that is to be met in the next 3 to 5 years from now, and you want to invest from now, you might need one.

Balanced funds are also a good choice for Retirement planning. Assume you are now in your 40s and want to build a safe corpus by the age of 50, balanced funds are the preferred choice.

HDFC Prudence Fund vs ICICI Prudential Balanced Advantage Fund

One of my friends father was advised to buy ICICI Balance Fund rather than HDFC Prudence Fund. Can you please tell which one is better. He wants to opt for monthly dividend for his retirement.

While I do not know the reasons as to why ICICI Balanced Fund is preferred over HDFC Prudence Fund in his circumstances, I would go for HDFC Prudence Fund. Here is why:

  • Both HDFC Prudence Fund and ICICI Prudential Balanced Advantage Fund are Equity-oriented Hybrid funds.
  • Both have near to same AUM. HDFC Prudence Fund has 16,469 cr vs ICICI Prudential Balanced Advantage Fund has 17,368
  • Expense Ratio: ICICI Prudential Balanced Advantage Fund has better expense ratio of 0.79 vs HDFC Prudence Fund of 1.03
  • 1-year returns: HDFC Prudence Fund returns are 35.22% vs ICICI Prudential Balanced Advantage Fund returns are 24.74
  • 3-year returns: HDFC Prudence Fund returns are 23.32% vs ICICI Prudential Balanced Advantage Fund returns are 17.82
  • HDFC Prudence Fund tops the category with a #1 rank compared to 85 similar schemes.
  • Posted on Feb 20, 2017

HDFC Prudence Fund vs HDFC Balanced Fund

  • Data as per HDFC MF Fact Sheet March 2017
  • Investment Objective
    • HDFC Prudence Fund: To provide periodic returns and capital appreciation over a long period of time, from a judicious mix of equity and debt investments, with the aim to prevent / minimise any capital erosion. Under normal circumstances, it is envisaged that the debt : equity mix would vary between 25:75 and 40:60 respectively. This mix may achieve the investment objective, may result in regular income, capital appreciation and may also prevent capital erosion.
    • HDFC Balanced Fund: To generate capital appreciation along with current income from a combined portfolio of equity & equity related and debt and money market instruments.
  • Portfolio Allocation
    • HDFC Prudence Fund: Equity: 74%; GSec: 10; Credit Exposure: 13; Cash & Others: 1
    • HDFC Balanced Fund: Equity: 69%; GSec: 17; Credit Exposure: 8; Cash & Others: 4
  • Inference: Within balanced schemes, HDFC Prudence Fund is for the aggressive investor while HDFC Balanced Fund is the stable moderate-risk taking investor

Guarantee of dividends?

In case of HDFC prudence fund if the market goes down whether my initial investment will remain intact?

Suppose I invest 1 lac and if market goes down, would I continue to get dividend on 1 lac or on NAV ?

Since Balanced funds have exposure to equities, the value of your invest will go down as well.

In general, the fund manager tries to save some money so that he can be as consistent as possible in paying dividends in future but he cannot guarantee it.

In fact, by the very nature of regulations related to mutual funds, no mutual fund scheme can guarantee a dividend.

The best way to build a safe corpus for secondary monthly income is to SIP for as long as possible such that you are getting sufficient dividends month after month.

Secondary Income + Liquidity

Question: I have a corpus of Rs. 1 Lakh. My plan is invest lumpsum now n get monthly income into sip. I also want to withdraw amount of my lumpsum whenever require. Is there any scheme?

Balanced mutual schemes invest 65% of money into equities and can be give returns like 20% per annum. You can opt for a monthly tax-free dividend return which can be like a secondary income.. However, there will be an exit load of 1% if redeemed within 1 year. So, they are not liquid per se.

Because you also have a need to stay liquid, it is better to split the money into balanced schemes for regular returns and some fund into ultrashort term for ur emergency needs. Perhaps 75% for balanced funds and 25% for ultra-short term funds.

Invest as a lumpsum or in steps?

Question: If I have a corpus of say Rs. 1 Lakh, can we invest in Lumpsum or should we invest in steps?

If you wish to invest in an equity-oriented balanced fund, it is always better to invest in steps and never put money as a lumpsum.

A typical pattern would be to invest 25k every 15 days.

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