Ideal for moderately conservative investors who wish to have some
equity exposure, can build a retirement kitty with mutual fund using #SIP to
invest and Systematic withdrawal plan to get a monthly income) reap maximum
benefit of this fund category.
In my previous posts I have written about #debt and #equity mutual
funds and the advantages of investing in #mutual funds. In this post I would
like to share some insight about the equity oriented hybrid funds which offers
best of both worlds. These equity oriented balanced funds/ hybrid funds/
dynamic allocation funds should be part of core investment portfolio of an
individual investor of any age
What investors can expect from these funds?
1. Tax free returns after 12 months, and exit load free after
12-18 months depending on the fund house
2. Much higher return than Bank FD with lower downside risk
compared to pure equity funds, mostly matching index returns over long term
3. Doesn’t matter you are 22 or 42, Ideal as long term wealth
creation with moderate risk, can build a retirement kitty with SIP and use SWP
(Systematic withdrawal plan) to reap maximum benefit of this fund
4. Even the worst fund in the category has given 10% return in
five years. The top 5 have averaged return over 15%
5. This category is expected to deliver less volatility with
consistency compared to the equity market
What investors should not do?
1. Not compare it with a largecap/ midcap/ thematic funds, they
may swing higher both sides and have a different investment approach and
objective
2. Do not consider hybrid funds to be risk-free, all investment
instruments come with own share of risks, however, due to its diversification
between asset class, it generally experiences less downside compared to
benchmark. Not to get lured by past performance and very high returns, it is
possible that fund management is taking higher risk than the fund mandate and
may expose you to risks you do not wish in this category
What are #dynamic allocation/#balanced funds?
Here, I am focusing on equity oriented balanced funds. These
funds have about 65% exposure in equity and rest in debt and cash. Thumb rule
good investment practice, buy at low and sell at high is automatically adhered
to because of its scheme mandate, mitigating risk for the investor. And during
low phases it adjust its portfolio with higher equity buy and lower exposure in
debt. The USP of the product category is capturing the downside risk. The chart
defines how it actually benefits the investors.
Debt oriented balanced/hybrid funds also part of the hybrid
funds category which is ideal for conservative and retired investors. These
funds are treated as debt instrument for taxation purpose.
Who should buy equity oriented dynamic allocation funds (#balanced
funds)?
The category is for everyone. This carries lower risk compared
to pure equity plays, still enjoys tax free returns as any #equity fund. The
investment philosophy is simple but extremely effective “buy
low and sell high”, as the equity market sees a upswing, fund
managers book profits to rebalance the portfolio and vice versa when market
falls. This is much easier said than done but the investment mandate is such,
that automatically fund managers follow the rules and avoid temptation of
exposing the fund into higher risk area.
ICICI
Prudential balanced advantage fund, the
fund with the largest AUM in the category has beaten the category average and
nifty 50 returns in the past 5 years and given return of 16% annualised return.
Portfolio allocation of ICICI
Prudential Balanced Advantage Fund shows
higher commitment towards protecting the investor’s money along with generating
surplus return. The equity portfolio is dominated by largecap companies and
debt category has maximum exposure in govt securities of about 12% of the
portfolio, most debt investments are in high credit score category of AA and
above.
The graph of 5 years return of a hypothetical investment of Rs.
10,000 in balanced funds of the top 5 mutual fund companies viz-a-viz Nifty
Graph source – Moneycontrol.com
Disclaimer - Mutual Fund investments are
subject to market risks, read all scheme related documents carefully
