Skip to main content

Balanced Funds vs Large-Cap Funds






LET'S TOSS A COIN Despite a better risk-reward profile, balanced funds are not substitutes for large-caps

The stellar performance of balanced funds over the past few years has attracted the attention of investors. Harnessing the return potential of equity and the safety of debt, balanced funds, for many , is the core of their portfolios. These funds have trumped the returns of large-cap equity funds across the three-, five and 10-year time frames. And this higher return has come at a much lower risk. Does this mean that balanced funds are a better bet than large-cap funds? Would investors be better-off replacing their large-cap funds with balanced funds?


Balanced funds have been sold to conservative investors as an ideal product that captures the potential of equities without the accompanying volatility. Balanced funds as a category has clocked a lower


standard deviation--a measure of volatility in fund returns--of 10.98 compared to the large-cap funds category , which has averaged 14.92. Balanced funds have also recorded a higher


Sharpe Ratio--a measure of risk-adjusted returns--of 1.36 compared to 1 of large-cap funds. This suggests balanced funds boast of a much better risk-reward profile.

However, experts counter that many balanced funds do not fit the conservative profile of this catego ry. Some are, in fact, riskier than large-cap funds.

Balanced funds cannot be a replacement for large-cap funds as it is the former's aggressive stance that has contributed to their higher returns. Some balanced fund portfolios have a distinct mid-cap tilt, which lends a higher risk profile to the fund.

The debt portion in a balanced fund masks the fact that many balanced funds today have a mid-cap bias. This makes them favourable for those who want to take on higher risk compared to a pure large-cap fund.

For instance, HDFC Prudence has a standard deviation of 16.6, which is much higher than the basket of large-cap funds. Several funds, even with a lower standard deviation, are exposed to higher volatility in their equity portfolio but it is not visible due to the cushion that the debt portion provides.

Nagpal points out balanced funds often do not have a clear positioning for their equity portion, which makes it difficult to gauge the fund's investing stance.  Some balanced funds do not have a set strategy in their equity allocation. An unconstrained approach to portfolio construction provides little comfort when the product is meant for a conservative investor.

Some funds also take on higher risk inadvertently , when taking individual stock exposure. All equity funds, including balanced funds, are mandated to restrict exposure to individual stocks to 10% of the portfolio. But when a balanced fund takes high exposure to a stock within its equity allocation, it is effectively taking a higher risk for its entire portfolio (including debt portion).

Another reason for the popularity of balanced funds is their tax-efficiency . Debt funds on their own are not tax-friendly, as one must hold them for at least three years before the capital gains can be treated as long-term, and be eligible for lower tax. Gains from equity funds on the other hand are tax-free after a year of holding. Equity-oriented balanced funds, recognised as equity funds for tax purposes, effectively let investors enjoy gains in the debt portion without incurring tax.

Despite their tax efficiency , Shah feels investors can do better by handling the equity and debt portion separately . "One can handle asset allocation better by having separate funds for the two asset classes. A balanced fund rebalances within a very nar row band. Besides, a debt fund comes at a much lower expense ratio compared to a balanced fund.


Investors must understand the circumstances in which balanced funds have delivered stellar returns.


The cycle of falling interest rates over the past few years has improved the returns from the debt p o r t i o n o f b a l a n c e d f u n d s.Combined with the healthy stock market returns, the overall performance has got a twin boost. This will not sustain going forward as interest rates are nearing the end of the softening cycle.


This will hurt the debt portion of balanced funds, most of which is invested in long-duration government securities that are most sensitive to interest rate changes. The constrained equity exposure may limit balanced funds' performance vis-a-vis large-cap funds going ahead. With the economy set to kick into higher gear, the stock market is likely to outperform in the coming years. It would make more sense to be invested in a 100% equity product than one which only provides around 70% exposure.


Since balanced funds do not let the gains in stock investments run beyond a point to keep equity exposure within a band, it limits the potential of gains from a rising market.






-----------------------------------------------
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 Saver 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. Religare Tax Plan

4. DSP BlackRock Tax Saver Fund

5. Franklin India TaxShield

6. ICICI Prudential Long Term Equity Fund

7. IDFC Tax Advantage (ELSS) Fund

8. Birla Sun Life Tax Relief 96

9. Reliance Tax Saver (ELSS) Fund

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

Tata Mutual Fund

Being a part of the Tata group, the fund has the backing of a very trusted brand name with strong retail connect. While the current CEO has done an excellent job in leveraging the Tata brand name to AMC's advantage, it is ironic that this was just not capitalised on at the start. Incorporated in 1995, Tata Mutual Fund remained an 'also-ran' fund house for around eight years. Till March 2003, it had a little over Rs 1,000 crore in assets and 19 AMCs were ahead of it. But soon after that the equation changed. It was the fastest growing fund house in 2004 and 2005. During these two years, it aggressively launched six equity funds, two debt funds and one MIP. The fund house as of now stands at No. 8 in terms of asset size. This fund house has a lot to offer by way of choice. And, it also has a number of well performing schemes. Tata Pure Equity, Tata Equity PE and Tata Infrastructure are all good funds. It also has quite a few good debt funds. The funds of Tata AMC are known to...

UTI Mutual Fund

Even though only a few of UTI’s funds are great performers, this public sector fund house has many advantages that its rivals do not. It has a huge base of retail equity investors and a vast distribution network. As a business, it looks stronger than ever, especially in the aftermath of credit crunch. UTI is, by a large margin, the most profitable fund company in the country. This is not surprising, since managing equity funds is more profitable than debt. Its conservative approach and stable parentage is likely to make it look more attractive to investors in times to come. UTI’s big problem is the dragging performance that many of its equity funds suffer from. In recent times, the management has made a concerted effort to improve performance. However, these moves have coincided with a disastrous phase in the stock markets and that has made it impossible to judge whether the overhaul will eventually be a success. UTI’s top performers are a few index funds, some hybrid funds and its inf...

Salary planning Article

1. The salary (basic + DA) should be low. The rest should come by way of such allowances on which the employer pays FBT and you don't pay any tax thereon. 2. Interest paid on housing loan is deductible u/s 24 up to Rs 1.5 lakh (Rs 150,000) on self-occupied property and without any limit on a commercial or rented house. 3. The repayment of housing loan from specified sources is also deductible irrespective of whether the house is self-occupied or given on rent within the overall ceiling of Rs 1 lakh of Sec. 80C. 4. Where the accommodation provided to the employee is taken on lease by the employer, the perk value is the actual amount of lease rental or 20 per cent of the salary, whichever is lower. Understandably, if the house belongs to a family member who is at a low or nil tax zone the family benefits. Yes, the maximum benefit accrues when the rent is over 20 per cent of the salary. 5. A chauffeur driven motor car provided by the employer has no perk value. True, the company would...

8 Investing Strategy

The stock market ‘meltdown’ witnessed since the start of 2005 (notwithstanding the recent marginal recovery) has once again brought to the forefront an inherent weakness existent in our markets. This is the fact that FIIs, indisputably and almost entirely, dominate the Indian stock market sentiments and consequently the market movements. In this article, we make an attempt to list down a few points that would aid an investor in mitigating the risks and curtailing the losses during times of volatility as large investors (read FIIs) enter and exit stocks. Read on Manage greed/fear: This is an important point, which every investor must keep in mind owing to its great influencing ability in equity investment decisions. This point simply means that in a bull run - control the greed factor, which could entice you, the investor, to compromise with your investment principles. By this we mean that while an investor could get lured into investing in penny and small-cap stocks owing to their eye-...

Debt Funds - Check The Expiry Date

This time we give you an insight into something that most debt fund investors would be unaware of, the Average Portfolio Maturity. As we all know, debt funds invest in bonds and securities. These instruments mature over a certain period of time, which is called maturity. The maturity is the length of time till the principal amount is returned to the security-holder or bond-holder. A debt fund invests in a number of such instruments and each of these instruments would be having different maturity times. Hence, the fund calculates a weighted average maturity, which would give a fair idea of the fund's maturity period. For example, if a fund owns three bonds of 2-year (Rs 30,000), 3-year (Rs 10,000) and 5-year (Rs 20,000) maturities, its weighted average maturity would be 3.17 years. What is the big deal about average maturity then, you may ask. Well, knowing a fund's average maturity is important because it tells you how sensitive a fund is to the change in interest rates. It is ...
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