Skip to main content

Balanced Mutual Funds Optimize Asset Allocation

Balanced Mutual Funds Invest Online
 
Balanced Funds article in Advisorkhoj - Optimize your Asset Allocation with Balanced Mutual Funds
Picture courtesy - GraphicStock

We have discussed earlier in our blog that, asset allocation is the most important aspect of financial planning. A number of studies have proven investing according to asset allocation principles and rebalancing the portfolio on a regular basis, gives excellent returns and is the most effective way of meeting your financial goals. Asset allocation depends on the age, investment horizon, income and financial goals on the investor. Though there are no hard and fast rules for asset allocation, some commonly used asset allocation guidelines suggest 70% equity and 30% allocations, for investors between 30 to 40 years of age. Some asset allocation guidelines suggest that even investors in the age group of 40 to 50 years of age can opt of 70% equity and 30% debt allocations. Balanced funds which have 65 – 70% of their portfolio invested in equities and the rest in fixed income securities are excellent investment options for such investors.

Advantages of Balanced Funds

  • On a risk adjusted basis top performing balanced funds have delivered excellent returns compared to equity mutual funds. The chart below shows the comparison of average annualized returns of diversified equity and balanced funds categories over the 3 years, 5 years and 10 years time periods. Returns based on July 17 NAVs.

While the difference in returns between diversified equity and balanced funds categories over 3 and 5 year time periods have not been significant, the volatility of returns is much lower for balanced funds compared to diversified equity fund. The chart below shows the comparison of annualized standard deviation of average monthly returns diversified equity and balanced funds categories over the 3 years, 5 years and 10 years time periods.

  • Balanced funds provide investors the benefit of automatic portfolio rebalancing. Why is portfolio rebalancing important? Since assets have different rates of returns, over a period of time the asset allocation of your portfolio deviates from your target asset allocation. So from time to time, you need to rebalance your portfolio so that your portfolio is aligned with your target asset allocation. Let us understand this with the help of an example. Let us assume you have investment corpus of Rs 5 lacs. Your target asset allocation, as per your age, income and investment horizon is 70% equity & 30% debt. Accordingly, you have invested Rs 3.5 lacs in an equity fund and Rs 1.5 lacs in an income fund (or debt fund). Let us further assume that the equity fund gives an annual return of 15% and the income fund gives a return of 8%. The table below shows the growth of your investment.

We can see in this example that by year 5 the equity allocation has increased to 76% and debt allocation has decreased to 24%, because the equity and debt investments have been growing at different rates. However, this has caused your portfolio to deviate from your asset allocation target and exposed your portfolio to higher risks. If the deviation from your target exceeds a certain tolerance band, you should re-balance your portfolio either by making fresh debt investment or by booking part profits in your equity investments and reinvesting in debt. This re-balancing happens automatically in balanced funds. Suppose a balanced fund has 70% exposure to equity and 30% to debt. If the market rises sharply causing the equity allocation to increase to 80%, the fund manager will sell 10% of the equity holdings to bring back the equity exposure to 70%. On the other hand, if the market falls the fund manager will buy more stocks to maintain the 70% exposure to equities.

  • Since long term capital gains is tax exempt for equity oriented schemes, you get tax free returns on the debt component of your equity oriented balanced funds. Balanced funds are among the very few schemes where the return on the debt investment is tax free. Fixed deposit interest is taxable at the income tax slab rate of the investor. Even debt funds returns held for less than 3 years will be taxable at the income tax slab rate of the investor, as per the new Budget. Debt funds returns held for more than 3 years will be taxed at 20% with indexation.

Comparison of returns of balanced fund versus combination of equity fund and fixed deposit

Will you be better off constructing your own balanced portfolio or investing in balanced funds? Let us analyze with the help on an example. Let us assume your asset allocation target is 70% equity and 30% debt. We will examine two investment options:-

  • You constructed your own balanced portfolio, by selecting top performing diversified equity fund and investing 70% of your investible corpus in the fund. You invested the balance 30% in a fixed deposit. For the equity portion we have chosen ICICI Prudential Dynamic Plan, a diversified equity fund. ICICI Prudential Dynamic Plan has given nearly 19% annualized returns over the last 5 years. Your investment period was the last 5 years.

  • You invested your investible corpus in a top performing balanced fund. We have chosen a top performing balanced fund from the ICICI Prudential stable. Our balanced fund selection is ICICI Prudential Balanced fund. Like ICICI Prudential Dynamic Plan, the ICICI Prudential Balanced Fund has also given excellent returns over the last 5 years. Since ICICI Prudential Balanced fund has equity exposure target of around 70%, your asset allocation target would have been met. As in option 1, your investment period was the last 5 years.

Let us now see how the returns compare after 5 years. The table below shows the return on the portfolio of the equity fund and fixed deposit.

Let us now compare the above with the return on the balanced fund investment.

We can see that the return on the balanced fund is Rs 1.08 lacs higher than the portfolio of the equity fund and fixed deposit. What if you had invested in a good long term income fund instead of fixed deposit in option 1? Sure, the return would be higher if you had invested in an income fund, since it is more tax efficient than a fixed deposit. However, the return on the balanced fund would still be higher

Conclusion

Balanced funds are excellent investment long term investment options. They can help you meet your asset allocation targets, help you with automatic rebalancing of your portfolio and are more tax efficient. If you have a more aggressive asset allocation target, combine your balanced fund investment with a large cap equity fund or a mid cap fund. If you have a conservative asset allocation target you can consider monthly income plans, which are another variant of balanced funds, for conservative investors (please see our article, Top 5 Mutual Fund Monthly Income Plans). However, as with all mutual fund investments, it is imperative that you select a top performing balanced fund. Difference in the performance of a fund in top quartile and bottom quartile is significant. You should consult with your financial adviser, if balanced funds are suitable for your investment portfolio.

-----------------------------------------------
Invest Rs 1,50,000 and Save Tax under Section 80C. Get Great Returns by Investing in Best Performing ELSS Mutual Funds

Top 10 Tax Saving Mutual Funds to invest in India for 2016

Best 10 ELSS Mutual Funds in india for 2016

1. BNP Paribas Long Term Equity Fund

2. Axis Tax Saver Fund

3. Franklin India TaxShield

4. ICICI Prudential Long Term Equity Fund

5. IDFC Tax Advantage (ELSS) Fund

6. Birla Sun Life Tax Relief 96

7. DSP BlackRock Tax Saver Fund

8. Reliance Tax Saver (ELSS) Fund

9. Religare Tax Plan

10. Birla Sun Life Tax Plan

Invest in Best Performing 2016 Tax Saver Mutual Funds Online

Invest Online

Download Application Forms

For further information contact Prajna Capital on 94 8300 8300 by leaving a missed call

---------------------------------------------

Leave your comment with mail ID and we will answer them

OR

You can write to us at

PrajnaCapital [at] Gmail [dot] Com

OR

Leave a missed Call on 94 8300 8300

-----------------------------------------------

Popular posts from this blog

ICICI Pru Mutual Fund Dividend

ICICI Prudential Mutual Fund has announced dividend under the following schemes: Scheme Dividend ( Rs /unit) ICICI Pru Capital Protection Oriented Ser V Plan B-D 0.03611325 ICICI Pru Capital Protection Oriented Ser V Plan B Direct-D 0.03611325 ICICI Pru Balanced Advantage Direct-DM 0.06 The record date has been fixed as February 08, 2017. ------------------------------ ------ Invest Rs 1,50,000 and Save Tax upto Rs 46,350 under Section 80C. Get Great Returns by Investing in Best Performing ELSS Funds Top 4 Tax Saver Mutual Funds for 2017 - 2018 Best 4 ELSS Mutual Funds to invest in India for 2017 1. DSP BlackRock Tax Saver Fund 2. Invesco India Tax Plan 3. Tata India Tax Savings Fund 4. BNP Paribas Long Term Equity Fund Invest in Best Performing 2017 Tax Saver Mutual Funds Online Invest Best Tax Saver Mutual Funds Online Download Top Tax Saver Mutual Funds  Application Forms For further information contact  SaveTaxGetRich on 94 8300 8300 ------------------------------ ------ Leave y...

Hidden Bank Fees

  What Banks Hide From Customers Imagine after a peaceful and exciting holiday you receive your bank statement with steep charges. You then rush to your bank and start confronting staff members and to your dismay, you come to know that the high end debit card was charged very heavily. Wouldn't this cause damage to your finances? So remember, the world outside is full of deceptive and double cheating people. Unethical practices are always used by company sales person in order to meet the target. Credit card companies, mutual funds and bank institutions always play dirty tricks to lure customers and the practices are rampant. So here's how you should be careful while dealing with your banks: High End Debit Card Charges While opening an account with a bank you opt for a debit card with minimal charges. But later on when you upgrade your card and opt for high end debit card the annual charge rise by a good amount. Though such a card has slew of features but it all comes at a high ...

Partial withdrawal from PPF

  Public Provident Fund (PPF) account has a lock in period   If you opened a PPF account to meet your retirement needs,, think twice about withdrawing from this fund before retirement. But provided it's an emergency here are the rules. Public Provident Fund (PPF) account has a lock in period before which you cannot withdraw your money.   The partial withdrawal is allowed after the completion of 6 financial years . This means that you will be allowed a partial withdrawal from 1 April 2017. The maximum partial withdrawal allowed is the least of the following: 50 percent of the account balance at the end of fourth financial year, 31 March 15 50 percent of the account balance of the end of previous financial year, 31 March 17.   There's a loan option available on your PPF account between the fourth and the sixth financial year. You can obtain a loan of up to 25 per cent of the balance in your account. However, this will attract interest of 2 percent more than the prevailing ...

Updating a minor PAN card upon becoming adults

  Updating a minor's PAN card once they become adults A PAN card issued in the name of a minor does not contain the minor's photograph or signature, and therefore, cannot be used as a valid proof of identity. Once a minor PAN card holder turns 18, the relevant changes must be made in the PAN records. A new card is then issued bearing a photograph and signature. Application The applicant is required to fill up the "Request for new PAN card andor changes or correction in PAN data" form. The form can be filled up online by accessing NSDL's Tax Information Network website and clicking on the online PAN application tab. Information The applicant must mention the existing PAN number in the application and check the `photo mismatch' and `signature mismatch' boxes, and submit the online form. The form must also be printed out, signed by the applicant, and submitted along with two photographs. Documents Identity and address proof in the form of a copy of the app...

Perpetual SIP - Its Advantages

Retail investors have taken a fancy to investing in mutual funds through systematic investment plans (SIPs). As per industry estimates, Rs 4,000 crore flows into SIPs every month. One way to take advantage of SIPs in a true long-term manner is to opt for a perpetual SIP 1. What is a perpetual SIP? In an SIP , you make periodic investments in a mutual fund scheme of your choice generally every month for a pre defined tenure. While signing up an SIP mandate , you have the option to leave the end-date column blank. If the column is blank, it means the investor has opted for a perpetual SIP . Most fund houses assume this SIP will continue till December 2099 unless you give a written communication to stop it. However, some fund houses require you to tick the `perpetual option'. 2. What are the advantages of perpetual SIPs? Registering an SIP involves a lot of paperwork and it takes time. It is observed that many investors skip their SIP instalments when they go for short-tenure option...
Related Posts Plugin for WordPress, Blogger...
Invest in Tax Saving Mutual Funds Download Any Applications
Transact Mutual Funds Online Invest Online
Buy Gold Mutual Funds Invest Now