Sunday, 15 April 2012

Balanced Fund:Why Invest in Balanced Fund?

carlos porto
With a Firm determination to reduce my weight, I decided to visit a near-by fitness center.  Knowing that I intend to lose weight, the instructor said, “Regular Exercise and Balanced Diet Is All That You Need”. I said that’s All?

Here is the sample Balanced Diet Chart.
Breakfast: 4 Egg White and Glass for Fresh Fruit Juice.
Lunch and Dinner: Vegetable serving of ½ cup of raw leafy vegetable, high fiber vegetables like carrots, broccoli, green beans, etc For various vitamin.
I was quite upset when I did not figure out Potato and Cheese in the menu. I quickly asked him Is this balanced Diet? He said Yes Sir.
The word Balanced/Balance was soothing or simple to hear but so difficult implement. For now I have decided to live with my weight.  My visit to fitness center was an eye opener.
In Theory the word balanced looks so simple but practically it’s quite difficult to implement. Be it, Balanced Diet, Balanced Work-Life, and Balanced Exposure to different asset class.
By now we understand the word Balance/Balancing needs discipline. Let us see how difficult it for an individual investor to Balance his exposure to Equity and Debt.  For Example  :
Ashwin is keen to invest 60% of his money in Equity and 40% in Debt. Let us assume Ashwin starts off with 100 Rupees.  60 rupees goes toward equity and 40 towards debt. A year later 60 rupees invested in equity appreciates to 75 and 40 rupees in debt grows to 45.
Now in all 100 rupees has grown to 120 rupees (75 –equity and 45 – debt).  This has resulted to change in exposure – 62.5% in equity and 37.5% in debt. To make it 60% in equity and 40% in debt, Ashwin needs to move a portion of money from equity and transfer it to debt.Rebalancing the portfolio every now and then sounds like a mundane activity.
Is there an alternative for this?
Yes Balanced Funds are the answer. All that you need to is invest your money in Balanced Fund and leave the mundane rebalancing activities to Fund Manager. Is it not simple? I wish I had some alternative for balanced Diet…
Let us take a close look:
Balanced Funds are Mutual Funds that have exposure to both equity and debt. Exposure to equity is usually in the range of 60% to 75% and rest is invested into debt instruments. Fund manager is responsible for the asset allocation.
Advantage of Balanced Fund:
  •  Equity Balanced fund invest 65% in equity and 35% in Debt. This ratio will give decent exposure to Equity and at the same time optimum investment in debt.
  •  Tax Advantage:  Balanced fund with 65% exposure to equity is treated like any other equity fund. This means if you hold it for one year, you don’t have to pay tax. Further the dividend distribution tax is also not applicable. 
  • Balanced Fund would suffer less loss in comparison to pure equity funds if Stock Market tumbles. The exposure to debt will add as cushion.  In 2008, Balanced Fund suffered less in comparisons to its equity peers. 
  •  Due to risk adjusted nature of balanced fund (35% exposure to debt), there have been instances or period where Balanced Funds have outperformed Pure equity funds.
Take Away: Balanced Funds are less risky than Pure Equity Funds where the exposure to equity is around 95% or so….
Should we get into some comparison?
I am great fan of HDFC Fund House for the process they follow and I personally like the stock picking style of Prashant Jain. In addition to his stock picking style I salute his commitment towards his company. If I am not wrong, he is with HDFC from a very long Time.  HDFC Top 200 and HDFC Prudence are funds that are managed by Prashant Jain.  HDFC Top 200 is a Pure Equity Fund and HDFC Prudence a Balanced Fund.
On Jan 1st 1999, if Ashwin had invested 100 rupees in each of the funds (HDFC Top 200 and HDFC Prudence),   100 Rupees would have appreciated to:

HDFC Prudence – Balanced Fund
HDCF Top 200 – Pure Equity Fund

Date – 15/4/2012 - Figures shown are approximate.
Yes, you read it right. 100 Rs invested in balanced fund would have grown to 1900 Rs where as in case of HDFC Top 200 it would have grown to 1700.
Here is chart that shows returns for few Balanced Funds as on(15/4/2012):
Fund Name
3 years
5 Years
Reliance RSF- Balanced
HDFC Prudence Fund
HDFC Balanced Fund
DSP-BR Balanced Fund
Can Robeco Balanced Fund

Note : Returns are annualized : Source : Money Control
Disclaimer: My eye opener moment in fitness center is a powerful driving force to go for a balanced fund in my portfolio. No matter I lose weight or no, I discovered a balanced way of parking my money!

Additional Reading:
Have you invested in any balanced fund?


Anonymous said...


I am not investing in Balanced MFs. Currently I am investing Rs. 20,000 (Rs. 5000 in DSPBR Top 100 Equity G, HDFC Top 200 G, Rs. 5000 in Reliance RS Equity G, Rs. 5000 in IDFC Premire Equity G) in pure equity mutual funds, Rs. 12,000 in EPF and Rs. 3,500 in PPF every month.

Should I stop investing in PPF and pure equity mutual funds and start investing in Balanced Mutual funds? Is my portfolio balanced because I am investing in pure equity and pure debt?


WealthUCreate said...

NO. You are on Right track. Continue what you are currently doing. IN a way you are balancing your portfolio.

PPF is best debt component. You can invest a bit more in it...

Balanced fund are ideal for somebody who does not want to manage debt and equity seperately. I can also say, people who dont want to expose fully to Pure equtiy funds can go for balanced funds.

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