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#BQMutualFundShow: Balanced Funds An Excellent Product If Not Mis-Sold 

Balanced funds, also known as hybrid funds, include stocks and bonds to cushion investors from volatility in equity markets. But they are being mis-sold, according to Harsh Roongta, an independent investment adviser.

The problem, he said, lies with “guaranteed” dividend of 1 percent every month. Balanced funds are an excellent option as long as no one is promising a guaranteed return, he said on BloombergQuint’s weekly series The Mutual Fund Show. They offer auto-rebalancing of portfolio, he said.

Amol Joshi, the founder of Planrupee Investment Services agreed. “It has some asset allocation. So, you are not going 100 percent in equity.”

For someone looking to invest in stocks, balanced funds can be a good start, said Suresh Sadagopan, founder, Ladder7 Financial Advisories. They also can be a good option for those nearing retirement, he said.

Here are edited excerpts from the conversation:

What are balanced funds?

Harsh Roongta: Balanced funds are an excellent concept. It is an auto rebalancing kind of fund. Typically, 65-70 percent equity and 30-35 percent debt. If markets have gone up dramatically, the equity component percentage increases, a fund house is forced to sell the equity to bring it back to 65-70 percent. Assume markets have gone down, a fund house is forced to buy equity because the percentage will fall below 65-70 percent. It is contrarian by its very constitution, which is the way equity should be bought. It brings balance of 30-35 percent debt.

A balanced fund is an excellent investment option for anybody looking at the medium term. If you have at least a five-year horizon, then a balanced fund is an excellent investment option.

You have seen the kind of inflows that have happened, Rs 90,000 crore, and when you delve deeper you will find that most of the inflows came into the dividend option. A dividend option in any investment option is utter nonsense. May be in some specific situations where there will be some sort of advantage or some sort of need that it addresses, but dividend in mutual fund is a contradiction. It is useless. Now with a dividend distribution tax on it, it is useless.

The problem is balanced funds, over the last one year, have been sold on false promises of an assured 1 percent sort of dividend which is going to come home to investors if at all the market goes down. Dividend is not going to be possible to be paid and we are going to face problems where none should have actually existed. So, dividend is a problem. Balanced funds are excellent and I want to reiterate it. As long as nobody is selling you dividend options, I think you should look at it.

Balanced funds are excellent and I want to reiterate it. As long as nobody is selling you dividend options, I think you should look at it.

Also read: Investors Should Temper Return Expectations. Here’s Why

Are there any particular category of balanced funds? Are they categorised as different schemes or is there one simple balanced funds scheme which is available?

Amol Joshi: We have heard of the term scheme categorisation where the Securities and Exchange Board of India has come out with iron clad or very finely divided product buckets. In that bucket, balanced funds will be categorised as an aggressive equity fund or aggressive hybrid equity fund. When you go to a fund house, you will simply search for hybrid funds or balanced funds and you will find the respective funds. But if you know the category, you will click on the aggressive hybrid fund.

Many of the fund house are in the process of completing the fund categorisation to match with SEBI’s mandate. Most of the fund houses will complete it by this quarter. So, from July 1 onward, you will have a level-playing field in terms of how each product is called aggressive hybrid. All products will confirm to the same standard.

Are you also in the camp which says balanced funds are excellent product?

Amol Joshi: Without any doubt, balanced funds are an excellent product. It has some asset allocation. So, you are not going 100 percent into equity.

When you see a drastic fall in the market, like in 2008, where your Rs 100 becomes Rs 40 just like 20,000 on the index becomes 8,000. In such cases, your Rs 100 in pure equity fund diversified like an index will become Rs 40.

In balanced funds, the downside will be limited to the extent of one-third debt component of what you have. So, it is not for somebody who is a die-hard equity person, who knows and can tolerate a 10-20 percent kind of downside. So, asset allocation is built into it.

In a run-away market, if equity goes up by 10-30 percent, the equity component is, theoretically, likely to go up to 70-75 percent. Fund managers have to mandatorily cut it back to 63-65 percent levels. And it works on other way round. So, it is an excellent product. The product component remains as strong as ever.

Lot of people get confused which keeps 65 percent equity and 33 percent debt or 33 percent equity and 60 percent debt. Would all of this be a part of a broad category of balanced funds?

Suresh Sadagopan: Now, we are talking about category of hybrid funds. So, balanced funds which we are discussing is the one which have 65 percent or more in equity and 35 percent or so in debt. So, that is the typical category of balanced funds. Equity savings fund is a variation of a balanced fund. It is a hybrid fund. There will be certain level of equity and certain component of derivatives and certain level of debt. So, it is kind of a conservative product compared to a typical balanced fund. The derivatives component will also bring in a certain level of conservatism, may be a debt kind of return in 65 percent of component is what is sort to be achieved. Talking about hybrid funds, you can go down to the level of aggressive debt hybrid funds where the component of equity can be 20-25 percent. So, those funds are existing. People who want to participate in equity upsides, at the same time they don’t want to go overboard in equity, those kinds of funds are also there. There are funds which have 5-10 percent equity and rest of all in debt. So, there are entire flavours. As far as 50:50 is concerned, I think there are some children funds, which have 40-50 percent equity and debt.

At the current point of time in investing lifecycle and the market the way it is looking, are balanced funds a good investment product?

Suresh Sadagopan: Balanced funds are good investment products. For the person who is beginning and wants to test the equity, balanced funds may be a good place to start because it has certain level of equity and it has debt, too, to cushion the fall. So, it would be a very good starting point for somebody who want to test the waters for two-three years before they want to increase their allocation to equity.

For people who are nearing the retirement phase, this could be a very good place to be in. For people in the retirement phase, we do not give more than 30-40 percent in equity. They don’t want very aggressive products in the equity category. So, the large-cap index funds and balanced funds are kinds of products which we suggest. Balanced funds, from an adviser’s point of view, is not such a great product. A balanced fund has an equity and a debt component. So, at any point in time, I will never know that the balanced fund is doing well because of the debt or equity component per se. So, I will not be able to do it. Ideally, for customers of long-term horizon, I would prefer diversified equity products and debt products separately which I can compare.

Watch the full interview here.