Balanced Funds for conservative investors

Mutual Funds | admin | March 28, 2011 at 8:44 am

Almost without investors noticing, balanced funds have undergone a gradual but substantial change in their character. This is a change that investors must understand in order to get the right set of benefits from this very useful category of funds. Of course, balanced funds are hardly anything new for the Indian investor.

For a long time, balanced funds of one sort or another have been offered by fund houses —including the old Unit Trust's original Unit Scheme 64. Once upon a time balanced funds really were balanced. That is, they generally used to have about half of equity and half of debt.

This meant that they were a substantially conservative version of equity funds. The combination of debt and equity meant that a well-managed balanced fund would rise less than the equity market on the way up and then fall less than them on the way down. All in all, they were a nice way to capture some of equity's gains without having to face all of its volatility. While this basic character remains the same, balanced funds have evolved in a subtle but important way.

However, as the tax laws evolved to allow long-term equity holdings to be free of capital gains tax, fund companies have upped the amount of equity holdings to qualify for this tax-break . This means that now, these funds must maintain at least 65% of their holdings in equities .

In practice, since 65% is the floor, many funds are generally in the 70 75% range. At this level, they aren't too far from the asset mix that many equity funds have. This has transformed a balanced fund from a conservative fund to a performance-driven one. This has also been driven by the strategy followed by the dominant balanced fund, HDFC Prudence. A combination of tax laws and its aggressive equity posture has meant that balanced funds are now sold to investors as a performance play.

Fund marketers find that it's no use pointing out how their funds fall less than the indices . They have to show how they rise more than the indices , or at least more than other balanced funds. Interestingly, this has made balanced funds suitable for a broader audience than they were earlier. Added to this are the beneficial side effects of two other characteristics of balanced funds.

Source: Economic Times