The Mutual Fund Show: The ‘Balanced’ Approach To Investing
Balance funds deliver a relatively stable performance compared to equity funds.
Balanced funds lower the risk by investing in both debt and stocks compared to pure-play equity funds. On BloombergQuint’s weekly series, The Mutual Fund Show, Rajat Jain, chief investment officer at Principal Mutual Fund, explains why balanced funds are a better option for the risk-averse investors even when the stock markets are buoyant.
Here are edited excerpts from the conversation.
Why is it that balanced funds offer a better stability option compared to pure-play equity funds? What are the advantages that an average investor would have when he invests in balance funds irrespective of the time?
Balanced funds deliver a relatively stable performance compared to equity funds because the markets don’t tend move in a straight line. Balance funds have 65-70 percent of portfolio exposure to equities and the rest is towards debt. While they may lose versus the equity fund on the upside, they save much more when the markets are down.
We compared an equity fund and a balanced fund. The difference between the returns was one to one-and-a-half percentage points, which is not very meaningful compared to the risk that you have avoided being in the balanced fund.
Indian equity markets are looking buoyant; there are reforms, the markets are expected to rise over the course of next three to five years, irrespective of what happens in the next six months. Why should one not look at pure-play equity funds? Why should I limit my gains by investing in balanced funds?
Certainly, returns are important but also the risk that you are comfortable with. There are some investors who are not comfortable with this risk. Some investors are coming into the markets for the first time, people who are probably not comfortable with the risk, so it’s good to have both the options. On the risk-return (tradeoff), balanced funds stand up quite well.