Balanced Funds

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Hi All! Good Afternoon!

In yesterdays class, we started our discussion on Hybrid 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.

Amongst such funds, we discussed about how Monthly Income Plans can be used to get regular monthly 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.

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

What are Balanced Funds?

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.

Balanced scheme invests in both equity and debt securities at the same time.

So you can 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. So we need not have to time the market.

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

Types of Balanced funds

Now, lets check the various types of balanced schemes.

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 in equity instruments.

They have around 2/3 rd corpus invested in equity shares.

So, they are, in a way, wealth creators.

Of course, given a long time frame, equity schemes perform way better.

But if you see, because 2/3rd corpus is invested in equities in these equity balanced funds, these are tax efficient.

The profits from the sale of units from this scheme are treated as equity gains. Hence, they are tax efficient even when you are enjoying some debt investment part.

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 because a large amount of portion is invested in debt securities.

And because of some portion in 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

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.

Is Reliance Arbitrage Fund - MD option better than MIP?

You mentioned about one Reliance Arbitrage Fund - MD option... Is that better than MIPs?

Yes and No!

Here is why?

Yes because:

If the arbitrage fund is allowed to stay for 1+ year and when you need funds and redeem the units, the returns will be equity capital gains and hence tax free.

No because:

If the fund manager is not able to find good arbitrage deals, he might not get any dividend at all. In other words, the monthly dividend might be a lot more volatile.

On the other hand, in MIP, there is atl east some sort of guarantee from the debt allocation part to bring in the money necessary for the dividend.

What is the solutions?

Break ur investment into two parts and allot one for the arbitrage fund and the other for MIP.

Since both follow different approaches, if one fails for the month, the other one might come for the rescue.

What will be returns of MIP?

One query about calculation of investment into hybrid funds if I need Rs 10000 per month as my monthly expenses 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.

==Balanced funds in portfolio-- Question: 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, you have some financial need in the next 3 years and you want to invest now, you might need one.

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