Pedestrians walk past passengers sitting next to an advertisement for the Mutual Funds Sahi Hai campaign by the Association of Mutual Funds in India (AMFI) at a bus stop in Mumbai. (Photographer: Dhiraj Singh/Bloomberg)

#BQMutualFundShow: Why Balanced Funds Are A Good Choice For First-Time Investors

Balanced funds takes the asset allocation dilemma away from an investor and gives to a professional, Radhika Gupta, chief executive officer at Edelweiss Asset Management Company said on BloombergQuint’s weekly series, The Mutual Fund Show.

Gupta herself has 90 percent of her capital parked in balanced funds. This category is a good way to start investing in equities “without going whole hog”, she added.

Here are edited excerpts from the conversation:

Why are balanced funds so important, more so during volatility?

Radhika Gupta: People ask me, as an AMC head, where do I invest my money. And I say that 90 percent of my money is in balanced advantage funds. What’s very topical is that investors are coming into mutual funds and it is very important for them to have a good experience, especially first-time investors. If they a have good experience, whatever they start with, it will just grow. If they have a bad experience, it is not good for them, and not good for industry.

From a balanced fund point of view, markets are expensive. Markets have run up a lot. People are coming into mutual funds on the back of very high returns that they have seen over the last few years. This is constantly this question that should I time the market, is this the right time but balanced funds answer a lot of that.

What do balanced funds do differently than other fund categories?

Radhika Gupta: When you look at traditional equity funds, it is 90-100 percent invested in the market, typically 100 percent. Balanced funds, dynamic or static, have both debt and equity in them. The quantum of debt and equity will vary from fund to fund. Static fund will have 65-70 percent of its money parked in stocks and 30 percent in debt. Dynamic funds will have 30-80 percent of its money parked in equity and the balance in debt. By default, the risk becomes lower for an investor.

Would this be a necessary condition enforced upon a fund manager or is it left to his discretion but generally these bifurcations are at the levels that you spoke about?

Radhika Gupta: They are. Now, with the guidelines that Securities and Exchange Board of India is putting in place on schemes, the hybrid or balanced fund category is becoming very well defined. In terms of the two categories, these restrictions are going to be well enforced in terms of what you can and cannot do. Further they will be reflected and are already reflected in the offer documents and in the marketing material.

Why should an investor, even a first-time investor with a five-year horizon, choose a balanced fund?

Radhika Gupta: There is a saying that in life, it is not always about the happy endings but it is also about the journey that you go through. And for many of us it is not the headline return that we earn at the end, but the truth is that investing is a journey and an experience. If you have a year like 2008, while you may be investing for five years, someone like me would not want the capital to be down by 50 percent in a year. Maybe, that will cause me to exit the market. It’s just not something many people are comfortable with. With a balanced fund, maybe that number will be 35 percent. So that loss of capital and the discomfort with it, maybe that ride is a lot smoother.

Have balanced funds as a category managed to outperform the index, by and large, when the markets have risen?

Radhika Gupta: No. They should not be expected to outperform the index. If you are going into this with the expectation that they should outperform the index, you are investing in the wrong class. They will outperform the index on a risk-adjusted basis. The risk will be less than the index, the return could be like the index or a little less than it, but it is the same kind of experience for a smoother ride.

But these funds will give you a bigger bang for your buck compared to what the traditional fixed deposits would give you in any case?

Radhika Gupta: Yes. For newer investors looking at equity...they say when you are starting to swim, don’t go to the ocean first, try in a pool. And a balanced fund is that kind of pool. For newer investors, it is an easier way to get started.  

Would you advice a person already invested in equity, say if he is starting his fourth SIP and he has all investments in equity, a balanced fund would be the need of the hour for him?

Radhika Gupta: I think it is a very good asset class for any kind of investor, especially in today’s market condition. You are worried if this is the time to enter the market or not. So, the balanced fund takes that decision for you, that how much should I be in the market. For any regular equity investor, it’s taking that asset allocation problem away from you and giving it to a professional.

In the current scenario if somebody has a three-year horizon in mind, with a goal in mind, say a holiday, birthday party or anniversary, would a balanced fund be a good idea?

Radhika Gupta: Balanced funds lend themselves well to goal-based investing too, because over a three-year horizon – and the last three years have been great – but balanced fund will give you the 11-12 percent kind of outcome with more predictability than equities. So, from a goal point of view it works much better for an investor.

What are the pros and cons of dynamic and static balanced funds?

Radhika Gupta: Dynamic balanced category is a very flexible category. In my view, the more flexibility you give to a fund manager, the better off they are. When the markets are in great shape, balance funds could put 70-80 percent in equities and in a poor market, the fund manager could put 30 percent in equities. So, the decision of how much I should be invested, that will be taken care by a balanced fund. It tends to be less risky then the other class you mentioned, which is the static balanced fund.

Static balanced funds tend to be more aggressive. The upside will be higher, and they can’t manage the allocation as dynamically. But, typically, the returns will be higher.

So, you are saying static balance funds will capture the bull cycles better?

Radhika Gupta: Yes. They will capture the bull cycles better, but they will be hurt a little bit more in a downside. With dynamic balanced fund, you will get more downside protection and may be you won’t see the same kind of upside.

Would you advice to invest in a static balanced fund or a dynamic balanced fund?

Radhika Gupta: If you are looking for risk then there are equity funds which are fully invested. If you are looking for protection and looking for the balanced fund class, then go where there is more protection and I will advocate the dynamic balanced fund category. Over the last 2-3 years, you have seen growth in that category.

Watch the full conversation here: