Wealth Creation through Balanced Mutual Funds

Written on Sunday, April 10, 2016
By R.M.Murugan

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Balanced Funds are one category of Mutual Fund where the asset of the funds will be invested among debt and equity. Most of the balanced funds invest minimum of 65% of their corpus in Equity and rest in debt or gold. These funds are good for those who are looking for medium risk with the investment tenure of 4 years and above.


Investor Psychology:

While making investment in equities, you have to enter when the valuations are cheap & markets are low. You have to withdraw/book profit when the markets are trading at higher valuations/level.

But, most of the retail investors behave in the opposite way. They invest when the markets are at the peak. That is the time where everyone will discuss about the stock market performance. We can see more advertisements about equities in newspapers and media. Existing investors of equities will share only the positive of the market. By going through all these, Investors will break most of their Fixed Income Investments and divert maximum into Equities.

In the same way when markets are going down, initially they try to average the cost by way of additional purchase. Even then if the market is going down further, finally they redeem their money at the lower level because of panic and will invest the entire money into fixed income investments.


Importance of Asset Allocation:

If you follow a proper asset allocation strategy, then you need not worry about the market conditions. Asset allocation is the most important determinant of return in one’s portfolio. As per the studies, 92% of the portfolio return is decided by proper asset allocation only. Asset allocation will vary from person to person based on their risk taking ability, tenure of their investments, financial situations etc

Let see the Advantage of Asset Allocation by an example.

Assume that a person is following 60% equity and 40% debt asset allocation. Equity gives more return in bull market. When equities perform well, overall weightage on equity also goes up. While doing the periodic review on his asset allocation, for maintaining 60% equity, he needs to redeem some amount from equity and should invest the same into debt. This kind of profit booking from equity can be done when the market is up.

Same way, when the market is going down, his equity allocation won’t be 60% due to the negative return from the market and for maintaining his asset allocation this time he will have to redeem some portion of his debt investments and need to invest the same in Equity. This is like investing in Equity, when the markets are low.


Balanced Funds & Asset allocation:

Balanced Mutual Fund Managers follow asset allocation as their main strategy to generate returns over medium to long-term. Fund Managers do the asset allocation review periodically and do the rebalancing of their investments based on the weightage of equity and debt or gold. By doing this, they can invest in equity when the market is low and can book profit when it is up. This can help the investors to generate good return by avoiding 100% Equity when the markets are down.

 Following are the performance chart of few top performing Balanced Funds.




If you compare the performance of these funds with the performance of Indices, like, NIFTY MIDCAP 100, NIFTY 50, BSE SENSEX, NIFTY 500 & BSE MIDCAP, mostly balanced funds have beaten the Indices performance. Even if you look over 10 years CAGR of the Funds and Indices, all these funds have given more than the top Indices performance of NIFTY MIDCAP 100, which is 10.27%.

In real life scenario, managing asset allocation is a bit difficult. Those who feel that they don’t have time to do all these asset allocation and rebalancing work, can consider investing in Balanced Mutual Funds, where the fund managers can take care of it.


Taxation on Balanced Funds:

As most of the balanced funds are minimum 65% of their scheme asset into equity, you can enjoy the equity taxation on balanced Fund. If you redeem the amount before 1 year from the date of investment (Short Term), you have to pay 15% (plus applicable cess) tax on the profit. If the redemption is done after 1 year (Long Term) then you need not pay any tax on the profit earned.  

So if your intention is to create wealth in medium to long-term by following the asset allocation strategy, it is better to consider the Balanced Fund route.


Disclaimer  - Views expressed above are the author's own.

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