–Updated Jul 07, 2016—
Human mind is never able to control its emotion. People are erratic and err in judgement. How good will it be, if there is a mutual fund where I can just ‘Set and Forget’. Well, Balanced mutual funds are just that provided you choose a good fund.
The classification of mutual funds depends on the investments they carry out. A few mutual funds own stocks and termed as equity funds. Some others own bonds and termed as bond funds or fixed income funds. However, the balanced mutual fund is a combination of both stocks and bonds.
As always you must be impatient to learn the top 5 funds in India. I can hear you saying ‘Come on! I know all the story. Just tell the top balanced funds as mentioned in the title’. But once you read the ranking, don’t forget to check out why balanced funds are good.
That will help you with the logic behind investing in balanced mutual funds or Hybrid funds.
5 Best Balanced Mutual funds in India for 2016-17
Here is the list of top 5 best balanced mutual funds in India right now (not in order)
|Fund Name||Manager||AUM(in Rs. Crores)||3 year CAGR||5 year CAGR||NAV(in Rs)|
|Tata Balanced Fund||Atul Bhole||3135||23.6||16||153.6|
|ICICI Balanced Fund||Yogesh Bhatt||2404||21.8||15.5||82.8|
|Birla Sunlife 95 fund||Mahesh Patil||2200.2||20.7||14.1||518.3|
|HDFC Balanced Fund||Chirag Setalvad||1911.2||21.6||14.6||96.75|
|HDFC Prudence fund||Prashant Jain||11927.6||21.6||13.2||316.51|
1) ICICI Prudential Balanced Fund
This fund is really popular as it is from ICICI. As you can see they have also mopped up some good returns of 16% CAGR over last 5 years.
ICICI Pru balanced fund is a stable fund. Some top holdings include Reliance Ind, HCL Tech, Bajaj Finserv, Coal INdia. A bit heaavy on PSU scrips is my opinion.
Direct Government securities for 15% of assets and simple quality liquid plans for the debt portion.
2) HDFC Balanced Fund
With AUM of Rs1920 crores and nearly 5 year track record of 19% CAGR, this is certainly one of the best mutual funds. One of my top 2 funds in the list.
Chirag Setalvad, fund manager, has very good track record in MF industry. This fund was started in Sep 2000. Its current top holdings are HDFC Bank, Reliance, Infosys and SBI.
What I like more about HDFC balanced fund is the debt part. Just pure government securities for 24% of AUM ad no cluttering in debt portion. This balanced fund is a must have in my opinion as of today’s investment info available.
3) TATA Balanced Fund
I personally like this fund because of its potential to perform well ahead. It has given an average 16% CAGR over last 5 years and 23.5% over 3 years. The stock portfolio is also very decent and has good potential. The NAV is around Rs152.
You can find our detailed review on TATA Balanced Fund here for top holdings, expense ratios etc.
4) HDFC Prudence Fund
This fund is very popular and has the highest assets under management. It has Prashant Jain at its helm and he has a good reputation in the mutual fund industry. The fund also returned around 17% CAGR in last 5 years.
This balanced fund will be more suitable for conservative investors. It is heavy on large cap names like INfosys, SBI, ICICI Bank etc., The fund has been bit under performing compared to others in list but it is also one of less risk taking in this list.
It should be ready choice for people above 45 years of age and need to moderate their risk.
5) Birla Sunlife 95 fund
Managed by Mahesh patil this fund is probably the least favorite among top 5 balanced funds. Top holdings of this balanced fund include Reliance, HDFC Bank, TATA Motors, Maruti Suzuki.
My feeling is that it has too many scrips with negligible holding diluting returns. Close to 25 stocks are with less than 0.5% holdings and hence too distributed.
It is one of oldest funds started in 1995 and has good long term record.
My Picks: TATA Balanced funds for future performance potential and HDFC Balanced Fund for simple approach or HDFC Prudence Fund for the top quality manager it has.
Disclaimer: Make your own analysis while investing. The picks are my personal opinion. If fundamental condition changes in future, they may not perform as I expect.
Check out CRISIL rating of balanced funds here
For recent balanced funds performance data, check here
Why invest in balanced mutual funds?
Investors often look for ways to multiply their investment within a short time and with safety. Reducing the risk will prevent larger downfall due to the ever-changing market conditions. But the returns provided gets reduced somewhat.
With emotion and greed driving the market it is difficult to keep one’s head cool. You might be forced into taking decisions. It is always advisable to maintain a healthy mix of various asset classes for optimum portfolio allocation.
Balanced mutual funds help in just that. As it clubs the advantages of both stocks and bonds, customers will still not be overly affected if one asset class performs poorly. The converse is also true. The upside to the fund is less even when the market is on a bull run.
When one can’t make own decisions to re-balance their portfolio, balanced funds regulate the balance on a timely manner at pre-defined intervals.
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How Balanced funds work?
The balanced fund achieves the target of maintaining the balance because when the stocks fall, the bonds hold their value. When the stocks rise, the bonds yield lower value.
Assume you have a Rs. 100000 portfolio. The balanced fund allocation ratio that you have set is 75% stocks and 25% bonds. So now 75,000 is in stocks and 25,000 is in bonds. Due to market run, the stocks appreciated to 80000. Now the fund manager sells some stocks worth Rs1250 and puts them in bonds so that Rs 78750 (Rs 1,05,000*.75 = 78750) is in stocks and remaining in bonds.
This brings your portfolio back to 75% stock (Rs78750) and 25% bond(Rs 6250) ratio. This is done on a regular basis. The illustration may look simple but as your portfolio fluctuates wildly, this re-allocations brings stability.So when one asset class shoots up in value, it is sold and other is bought.
This structural combination offers enhanced flexibility, ensures that the investment of the investor is safe, and returns good profits in the end. That is why balanced mutual funds are one of best investment options.
Balanced mutual funds are best suitable for those who wish to invest and forget. Regular stocks or mutual funds require re-balancing from time to time to maintain the growth ratio in a positive fashion. The funds allow an investor to maintain a combination of equity and debt at right proportions.
Who decides the percentage split?
The division of the funds differs according to various mandates and the program offered by the respective investing agency. For example, equity hybrid funds from Birla Sun Life Mutual Fund invest 65% to the equity and the remaining in the debt.
The debt hybrid funds see an investment of 75% in debt and the remaining in equity. Therefore, an investor should consider the options available to him or her to plan according to their requirements and the amount they want to invest in mutual funds.
Pros & Cons of Balanced Mutual Funds
Based on the strategy and investment amount, the balanced or hybrid mutual funds come in three different variants – monthly income plans (MIPs), asset allocation funds and capital protection funds. The variations in the balanced funds offer the best of the both worlds – equity and debt.
Balanced mutual funds have shown profitable incomes in the last few years. For example, the hybrid funds alone have returned 18% in three years than the 23% from the Bombay Stock Exchange. In a similar period, mutual funds belonging to HDFC, Reliance, Birla Sun Life and Tata gave more than 20% as returns.
The hybrid funds have performed positively by returning 10% growth than the modest 5% rise in the stock index, comparing the performance of stocks and balanced mutual funds for previous five years. Such a growth will help the investors receive good profits with reduced risk.
Moreover, the functioning of the balanced mutual fund, which is a combination of stocks and bonds, fair in a troublesome market condition because of the cushioning effect offered by the bonds. Therefore, these funds have increased threshold limit against the rise and fall of the stock market.
However, when the market is riding on the bull, it will be difficult to achieve market-level profit because of the lower values attained by the bonds during this period. In either case, the investor will remain in the positive scale and still enjoy the profits. At the same instance, it is also possible to re-balance the funds, according to the market conditions.
For example, the fund manager invests 70% in equity and 30% into debt. If there is a decline in the stock market, the exposure to the equity will decrease drastically and leaves no other option for the manager but to buy more shares to retain the 70% target in equity. This is good for long term investment strategy.On the other hand, the 30% that remains in the safe zone offering a balance to the entire portfolio.
Similarly, when there is a rise in the stock market, the fund manager will sell around 10%(not exactly :)) from that to decrease the stocks and rise bonds to 30% of portfolio. It will eventually increase the profits, creating a balanced output as expected by the investor giving peace of mind. An important factor about the balanced mutual fund is the idea of lowering the risk factor.
How to choose a good balanced fund?
The interest charges and bond costs are inversely related. Therefore, the debt component rises when there is a shortfall in the stock market. It is feasible to invest in monthly investment procedure for profitable returns rather than looking at capital appreciation if your risk appetite is low. Therefore, while choosing a balanced mutual fund with low risk, it is essential to search for a profitable company offering high dividend payout.
The capital protection fund of the hybrid mutual fund is a close ended policy that aims at consistent returns and secure the money in the unpredictable market condition. It still delivers benefits because of the upside associated with the equity markets.
For example, these firms have an investment of 80% in debt funds with that fixed lock in period of a minimum three years. Such a step ensures that the principal amount remains a safe and generates a fixed amount at the end of the three years. The remaining 20% of the investment fund finds its place in equity to generate wealth.
The capital protection fund is suitable for people who do not want to risk of their principal amount. Although they invest in the equity, they still enjoy the safety due to the lock-in period and benefits offered by the plan. Although the do not guarantee a specified capital, they are proper for people who wish to safeguard their principal amount.
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Points to remember
It is crucial for the investor to estimate the asset allocation strategy, but not the market conditions while investing in balanced mutual funds. Such an action will help in dividing the asset in an optimum/intelligent way to balance equity and bonds.
Tax benefits of balanced funds
Balanced mutual funds with maximum exposure to the equity fall under the same tax laws as that of equity funds. The short-term capital gains fall under the tax rate at 15%, while the long-term capital gains attract no tax.
Furthermore, if predominantly invested in a fixed income, the returns attracts taxes as per your tax slab.The long-term capital gains also fall under the tax slab with 10% as without indexation and 20% with indexation.
Indexation is the process of adjusting the buying price, according to inflation. Therefore, there is a reduction in the capital gain when investing in debt products through balanced funds.
It is vital to compare and benchmark the performance of the balanced mutual funds against respective index, before beginning the process of investment. That step will offer detailed description about the marketing condition, well-performing funds, returns and obligations. Like what you read?
Why balanced funds are best and must for retail investors
While we have given you all the detailed information needed on balanced funds , here are 3 compelling arguments on why Balanced funds are best for retail investors.
1) Inflation – Equities form major portion of balanced funds. This is a major shield in battling against inflation which will erode your purchasing power in later years. So balanced funds protect your purchasing power and help fight inflation.
You may now argue why not invest in sectoral or diversified equity funds. These also invest in equities right? Read on..
2) Income tax – Do you know that you need to pay income tax on all debt instruments. The interest from debt will be taxed per your income tax slab. Balanced funds have this unique proportion where you can invest 35% in debt but still pay no tax on the interest earned from these debt products.
Cool, isn’t it? This unique feature is not available in diversified mutual funds and that makes balanced funds more suited for retail investor. Who wants debt when I can earn more with equity alone? the next point answers your question.
3) Volatility and asset allocation – The equity market always goes through ups and downs. There are periods of bull and bear phases. Nobody can predict with precision the beginning and end of each phase.
Human beings, driven by greed always tend to be over invested in the bubble. Balanced funds are a systematic way to curb your greed and maintain proper asset allocation. When equities form more than certain part of your portfolio, balanced funds rebalance them by selling few and adding to debt products which basically provide capital protection when equities fall in future.
Doesn’t this affect your returns? Partly yes and partly no. Because balanced funds under perform diversified equity funds in bull phases and over-perform them during bear phases. Since one cannot predict when these period of under performance and over performance occurs, it is better to stay the course.
Balanced funds protect your money by proper asset allocation and timely rebalancing which determines major part of returns over long term for retail investors.
You should definitely look at investing in balanced funds if you don’t want to maintain separate funds for equity and debt. It is also suitable if you don’t like to invest directly in stock market. You can choose if you want the style to be aggressive or conservative when you sign the policy document.
Balanced mutual funds are the unsung hero in the stock market. It gives you peace of mind and optimum portfolio allocation. So what are you waiting for? Invest in the best balanced funds and reap the benefits.
If you’re a retail investor looking to avoid undue risk, I will ask you to look no further than best balanced mutual funds.
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