Balanced Funds Achieve Superstardom, But Sometimes On Crooked Promises

Mumbai-based Pankaj Pusalkar preaches what he practices. The personal finance adviser and broker has invested in balanced fund schemes and advises his clients to do the same. Especially the dividend option to those above the age of 50 years. He says such investments mimic bank deposits and, better still, the income is tax free.

Many mutual fund distributors and brokers have started selling balanced fund schemes as superior alternatives to bank fixed deposits after fund houses started offering monthly dividends payouts.

This has led to a rush into balanced funds, sometimes on the basis of “dividend promises” said a senior fund manager at one of India’s largest mutual funds. That’s a sign of mis-selling, he said, preferring not to be identified.

The Popularity Of Balanced Funds

A balanced fund invests in both equity and debt instruments. Where more than 65 percent of the assets are invested in equity the scheme is referred to as an equity-oriented balanced fund and the same for debt.

In the last one year, several mutual funds have started offering monthly dividend as an option. Till then they offered quarterly, half-yearly or annual dividend payments on balanced fund schemes.

At between 0.7- 1 percent the monthly dividend payments may amount to an annualised tax free return of 8-12 percent. But the emphasis on 'may' is often lost when selling the schemes.

This allows them to compare very favourably to the 6.5 percent yield on fixed deposits offered by leading banks such as State Bank of India. Besides, interest income is taxable whereas mutual fund dividend income is not, below a certain threshold.

Distributors across the country have been targeting traditional bank customers to invest in balanced funds by highlighting this dividend feature. It’s now getting communicated as a promise, and it is taking the shape of mis-selling, said the senior fund manager quoted above.

In the January to September 2017 period assets under management for balanced fund schemes doubled to over Rs 1,34,868 crore, according to data released by Association of Mutual funds of India. The 30 balanced fund schemes currently under operation comprise 7 percent of the industry’s total AUM.

“If such things are happening in the industry, I don’t think it is right. But at the same time, in the long term, as long as, you focus on things that are good for the investors, you will be able to build a profitable business,” said Sundeep Sikka, chief executive officer at Reliance Nippon Life Asset Management Company Ltd.

Personal finance adviser Harshvardhan Roongta cautioned investors against the expectation that there can be any assured return or guaranteed return. If the markets crash there is a possibility that you may not get any dividend at all, and the rate of dividend is not fixed and depends on the profits of the scheme, he added.

But not everybody in the industry is worried about the potential mis-selling and its consequences. Dhirendra Kumar, investment expert and chief executive officer at Value Research points to the low risk of capital loss given the 4-5 percent moderate yield that balanced funds provide to long term investors.