Difference between revisions of "Balanced Funds"

Revision as of 07:16, 11 June 2017

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.

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.

Capital Protection-Oriented Funds

Finally, the next type of hybrid funds are *Capital protection-oriented*

• Capital protection-oriented* are a small variation of the balanced funds.

The difference is that there is no predefined limit in regard to allocation of equity and debt.

Capital protection-oriented funds are

=> suitable for people who have defined financial goals

=> or for those who require cash flows as the time of maturity

For example, in 3 years time, i want the funds to buy a car.

I would invest in a CPO fund that will mature near to the 3 year period

Similarly, i have to pay advance tax every quarter.

I would invest in a CPO that whose maturity date coincides with the due date of my advance tax payment. Something like 90 days, 180 days etc

So, you can observe that Capital protection-oriented funds come with a *fixed maturity date*.

Something similar to bank fixed deposit maturity date.

The fund manager invests both in equities and debt at the same time.

The investments will be in such a way that, at all times, the value of the investment is always more than the amount invested.

i.e they strive to ensure protection of the investment.

Remember there is no guarantee. Technically they do the balancing act to ensure capital protection.

These schemes are *close-ended* schemes.

So, once invested, you need to wait till the maturity date to get back your investment and gains.

There is no special tax efficiency because they are treated to be debt funds.

But unlike fixed maturity plans (FMP), they offer a bit of capital protection security.

These are not great schemes for retail investors.

You can use them only if you have a complex investment methodology and if you time various events related to financial planning.

So, this is about *Capital protection-oriented funds*

Hope you understood the topic.

I explained about Capital protection-oriented funds even when it is not so popular because as an investor, u shd know all the options and features available.

One scheme might not be useful to one person but the same one might appear to be very imporant for the other.

All this depends on the risk you wanted to take, the time horizon available and the nature of your financial goal.

This concludes our discussion on *Hybrid mutual funds*

One of our friend asked: Is there a way to invest online using MFU... I got my CAN number but it says to submit CTF to nearest POS

This is exactly why i am still not happy with MFU. Some paper work still needs to be done.

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. 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.