As the balanced funds are garnering investor’s attention amidst flip-flop in the stock market scenario, retail investors with a low-risk appetite can look at balanced funds with dynamic asset allocation. Most of such funds have been observed that they can give maximum returns in three or five years of duration. Such funds, including ICICI Prudential Balance Fund giving the highest returns, also offer the investors the benefit of equity as well as debt and combines then into a single fund, to meet the investor’s needs, according to money managers.
Betting big on these balanced funds, they feel that such type of funds offer greater stability, balanced income and capital appreciation. Because, equity levels in a balanced fund are generally maintained between 65-70 per cent, while fixed income between 30-35 per cent which is based on the fund manager’s assessment of market valuations.
When asked whether balanced funds see higher allocations to equity, Pankaj Mathpal, Director of Optima Money Managers observes that ICICI Prudential AMC uses an in-house price-to-book value (P/BV) model to decide the equity levels. “In this model, current market levels are compared to the fair value range to determine under or over valuation of the market. A lower price to book value than the fair value range triggers an increase in equity levels and vice versa,” says Mathpal.
Over the last one year, balanced funds have seen steady inflow of funds into this category with average monthly inflows at around Rs 1,700 crore. The assets under management (AUM) of the category witnessed a significant increase of over 54 per cent in the last one year alone. The AUM as on December 2016 stands at around Rs 64,954 crore, according to report by Association of Mutual Funds in India (AMFI).
However, it has been observed that equity as an asset class tends to outperform several other asset classes in the long run. There may be a case of inconsistent returns in the near term but it is often said that when one is planning for long term goals, investors should opt for equity oriented funds over traditional investment options.
A report by mutual fund house Value Research shows that four balanced funds among the top ten show the highest returns for the last 1-year, 3-years and 5-years categories, where ICICI Prudential Balanced Fund leads the race. However, not every investor is comfortable with the market volatility that hits the Street from time-to-time. As a result, mutual funds have an offering in the form of balanced funds for such investors. Balanced fund offers an investor all the qualities of equity oriented fund while being more conservative as it invests in both equity and debt. While equities help in wealth creation, debt offers the required stability in returns.
When compared the balanced fund returns with pure play equity and dynamic funds in last one year and three years, experts say that it would be unfair because the equity allocation in each of the type of fund is different. Mathpal, however, points to the fact that the largest AMC in the country has multiple funds which work on the dynamic asset allocation principle but have varying levels of equity. For example, ICICI Prudential Equity Income Fund has equity allocation of 20-40 per cent while ICICI Prudential Balanced Advantage Fund has 30-80 per cent of equity followed by ICICI Prudential Dynamic Plan where equity portion ranges between 65-100 per cent. “Hence, it would be unfair to compare each of these with pure equity schemes which will always have an equity allocation of 80-100 per cent,” he says.
In terms of returns, Matpal opines, “The benchmark index maintained by Value Research for the balanced fund category (VR Balanced Index) has given returns of 11.34 per cent in three years and 10.02 per cent in five years (CAGR basis). For the same duration, ICICI Prudential Balanced Fund has given returns of 22.02 per cent and 18.92 per cent respectively.”
