Balanced funds not only offered better returns than the large cap equity diversified funds but also reduced volatility.
Pocketing higher returns at lower volatility is a dream situation for many equity investors. However, for long term investors in balanced funds it has been a reality. Balanced funds as a category has not only offered better returns than large cap equity diversified funds but also managed to contain volatility. Do refer table to get an idea of the numbers
Over last three years, balanced funds offered 15.75% returns as compared to 12.92% returns offered by large cap equity funds. The large cap equity funds recorded standard deviation (measure of volatility) at 15.42 as compared to 11.98 recorded by balanced funds. Low number means less volatility.
For the uninitiated, balanced funds offer to invest in a combination of stocks and bonds in the ratio of 3:1. Put simply, the fund manager invests around 75% money in stocks and remaining money in bonds.
“Given the high interest rates in India, high exposure to stocks and ongoing rebalancing by fund managers, balanced funds manage to post such a stellar performance,” says Vishal Dhawan, CEO, Plan Ahead Wealth Advisors. He recommends balanced funds as a core portfolio holding for investors looking for an aggressive equity product with a 75% allocation to stocks. “Many investors believe that balanced funds offer to play equity when the stock markets are in boom phase and invests in bonds when the bonds are doing well, which is not the case,” he explains.
While the balanced funds and large cap equity funds may be seen as vehicles to invest in equities, investors must understand the difference. “Given the bond exposure of balanced funds, this is not an apple to apple comparison,” points out Feroze Azeez, deputy CEO, Anand Rathi Private Wealth Management. He prefers to compare balanced funds with an individual’s portfolio which comprises large cap funds, mid cap funds and bond funds. For retail investors it makes sense to go for balanced funds, instead of spreading their investments in these three separately.
“Given the tax arbitrage that balanced funds offer, even large investors can look at investing in balanced funds,” Feroze Azeez says. The balanced funds though invest in a mix of bonds and stocks, for the purpose of tax they are treated as equity funds. Gains earned on investments held for more than one year in these funds are tax free. Dividends declared by the balanced funds are also tax free. If an individual decides to invest 75% of his money in equity fund and remaining in bond fund, his gains in bond funds are subject to tax. If he opts for a balanced fund the gains earned on the bond component too are tax exempt as mentioned earlier. The tax arbitrage is not the only hook for the balanced funds.
The fund managers keep rebalancing the asset allocation of the scheme. That makes them sell stocks at every rise and buy stocks on each fall. This leads to buying cheap and selling dear – the dream mantra for any equity investor. The bond exposure not only cushions the downside but also offers money to buy stocks in prolonged downtrend in equities. More important is the rebalancing does not have tax-implications. Even for the purpose of asset rebalancing, if an investor sells his equity fund unit to buy bond funds and the other way round, it may have tax implications.
Though balanced fund may appear to be the best solution for all investment needs, here is a word of caution. “Balanced funds have done well in the past and they are expected to do well. However, there is a big up move expected in equities as macros improve and earning upgrades come in. In that scenario even large cap equity funds will outperform balanced funds in the medium term,” says Rupesh Bhansali, head- mutual funds, GEPL Capital. “But if you are new to equity markets or looking for a relatively less volatile way to invest in stocks, balanced funds definitely make a better option.”
-Rupesh Bhansali advises investing in HDFC Prudence Fund, SBI Magnum Balanced Fund and L & T Prudence Fund. Vishal Dhawan prefers to place his bets on HDFC Balanced Fund, SBI Magnum Balanced Fund and Tata Balanced Fund.(Moneycontrol Bureau)
Pocketing higher returns at lower volatility is a dream situation for many equity investors. However, for long term investors in balanced funds it has been a reality. Balanced funds as a category has not only offered better returns than large cap equity diversified funds but also managed to contain volatility. Do refer table to get an idea of the numbers
Over last three years, balanced funds offered 15.75% returns as compared to 12.92% returns offered by large cap equity funds. The large cap equity funds recorded standard deviation (measure of volatility) at 15.42 as compared to 11.98 recorded by balanced funds. Low number means less volatility.
For the uninitiated, balanced funds offer to invest in a combination of stocks and bonds in the ratio of 3:1. Put simply, the fund manager invests around 75% money in stocks and remaining money in bonds.
“Given the high interest rates in India, high exposure to stocks and ongoing rebalancing by fund managers, balanced funds manage to post such a stellar performance,” says Vishal Dhawan, CEO, Plan Ahead Wealth Advisors. He recommends balanced funds as a core portfolio holding for investors looking for an aggressive equity product with a 75% allocation to stocks. “Many investors believe that balanced funds offer to play equity when the stock markets are in boom phase and invests in bonds when the bonds are doing well, which is not the case,” he explains.
While the balanced funds and large cap equity funds may be seen as vehicles to invest in equities, investors must understand the difference. “Given the bond exposure of balanced funds, this is not an apple to apple comparison,” points out Feroze Azeez, deputy CEO, Anand Rathi Private Wealth Management. He prefers to compare balanced funds with an individual’s portfolio which comprises large cap funds, mid cap funds and bond funds. For retail investors it makes sense to go for balanced funds, instead of spreading their investments in these three separately.
“Given the tax arbitrage that balanced funds offer, even large investors can look at investing in balanced funds,” Feroze Azeez says. The balanced funds though invest in a mix of bonds and stocks, for the purpose of tax they are treated as equity funds. Gains earned on investments held for more than one year in these funds are tax free. Dividends declared by the balanced funds are also tax free. If an individual decides to invest 75% of his money in equity fund and remaining in bond fund, his gains in bond funds are subject to tax. If he opts for a balanced fund the gains earned on the bond component too are tax exempt as mentioned earlier. The tax arbitrage is not the only hook for the balanced funds.
The fund managers keep rebalancing the asset allocation of the scheme. That makes them sell stocks at every rise and buy stocks on each fall. This leads to buying cheap and selling dear – the dream mantra for any equity investor. The bond exposure not only cushions the downside but also offers money to buy stocks in prolonged downtrend in equities. More important is the rebalancing does not have tax-implications. Even for the purpose of asset rebalancing, if an investor sells his equity fund unit to buy bond funds and the other way round, it may have tax implications.
Though balanced fund may appear to be the best solution for all investment needs, here is a word of caution. “Balanced funds have done well in the past and they are expected to do well. However, there is a big up move expected in equities as macros improve and earning upgrades come in. In that scenario even large cap equity funds will outperform balanced funds in the medium term,” says Rupesh Bhansali, head- mutual funds, GEPL Capital. “But if you are new to equity markets or looking for a relatively less volatile way to invest in stocks, balanced funds definitely make a better option.”
-Rupesh Bhansali advises investing in HDFC Prudence Fund, SBI Magnum Balanced Fund and L & T Prudence Fund. Vishal Dhawan prefers to place his bets on HDFC Balanced Fund, SBI Magnum Balanced Fund and Tata Balanced Fund.(Moneycontrol Bureau)
No comments:
Post a Comment