Expert advice

Jun 08, 2017,14.31 IST

Are you investing in balanced funds for monthly dividends?

Renu Pothen

As I write this column, it takes me back to the time when our parents were content that they were able to achieve all their goals by investing into one of the most simple investment opportunities: fixed deposits. Now, caught up in the buzz around rocketing markets and a growing economy, I find that many investors of their age are considering investing into equity focused funds so that they can lead a stress-free life in retirement. Our discussions with a few retired investors recently gave us the feeling that they seem to be pretty impressed with the monthly dividends being generated by balanced mutual funds, and are thinking of moving significant chunks of their portfolio from banks into these funds. While all of us in the mutual fund industry have been consciously working towards greater inclusion in the markets, to me, this trend is a little bit worrying as it goes against well-proven asset allocation strategies. Some of us might argue that funds with equity exposure allow these investors a better chance at beating inflation. But have they really considered the risks involved?

The trend of older or conservative investors moving their life savings into balanced funds essentially means that they are convinced these funds can give them regular dividends that can beat fixed deposits by a good margin over the medium to long term. This might be true in the current scenario, but is this going to be the reality five years from now as well? How well do these investors understand the potential volatility and is it fair to subject them to the vagaries of the stock market?

What is the balanced funds category all about? Can these funds provide a regular stream of income to investors - not just retirees, but even others who need regular payouts? My endeavour in this column is to take a quick look at the category, its management, and its record of providing growth and stability, while keeping volatility to the minimum when markets get into a jittery mood.

‘Balanced funds’ fall in the hybrid category and have more than 65 percent of the corpus invested into equities, while the rest is allocated among fixed income instruments. A trend that we are seeing now is that funds recently launched in this category are not entirely investing 65 percent or 70 percent of the portfolio in direct equities, but a small exposure is being used to find good opportunities in the arbitrage space.

LIC Mutual Fund Balanced Fund is the oldest fund in the category launched in 1991, followed by Canara Robeco Balance, UTI Children’s Career Balanced Plan and HDFC Prudence Fund (erstwhile Zurich India Prudence Fund). As of April end this year, there are 24 balanced funds in the industry with a total AUM of Rs 98,165 crore. It is interesting to note here that ~ 55 percent of this AUM is concentrated in four balanced funds: HDFC Prudence Fund, HDFC Balanced Fund, ICICI Prudential Balanced Fund and SBI Magnum Balanced Fund. The top 10 balanced funds have 88 percent of the surplus allocated among them. HDFC Prudence Fund is the largest fund in the category having a corpus of Rs 22,057 crore which translates into 22 percent of the market share as far as this category is concerned.

We normally recommend that our first time investors take an exposure into balanced funds so that they can get a feel of the two asset classes (equity and debt) without going through a roller coaster ride when the market decides to panic. However, at this juncture, we should also evaluate to what degree balanced funds really insulate investors from volatility. We have analysed the portfolios of all 24 balanced funds and have the following observations in this regard:

• Balanced funds have their equity allocation invested across the market capitalization spectrum. This means that the funds in this category take an exposure into the large/mid/small cap and even micro cap space. While the fund mandate given in the Scheme Information Document (SID) allows them to take this exposure, the mid to micro cap space is a fairly risky one, and it is important that conservative investors are aware of and understand the resulting risks.

• Coming to the fixed income allocation, active management on the basis of the interest rate outlook seems to be the norm for a few balanced funds. Taking a more aggressive stance, a few funds also scout for opportunities in the credit space (low rated papers, for example), exposing investors to both duration and credit risk.

These two observations alone should help investors make a more informed decision about whether funds in this category can give them the regular payouts they desire. Fund houses can pay out regular dividends only out of the distributable surplus available with them. Our markets have been partying since we got a reform-oriented government at the centre. This has given opportunities to fund management teams to create ‘alpha’ (a return in excess of that indicated by the benchmark index) in their portfolios by picking up gems in the mid/small/micro caps space. This in turn has allowed them to garner good distributable surplus in their funds, and thus pay out good dividends. To top it all, the duration calls in the fixed income space have also been supporting the returns on these funds. A deeper study of the top 10 balanced funds in our model, however, reveals that these funds have missed out on regular dividend payouts (even in the monthly option) during 2010-2015. Hence, investors’ dependence on balanced funds having the ability to pay out regular dividends may prove to be unfounded if Dalal Street decides to change track and move in a southward direction for some time.


For new and conservative investors, exposure to balanced funds should be guided by a study of funds appropriate to their risk profile. A deeper study of the funds’ portfolios is warranted to make them aware of the potential risks and vulnerabilities. For risk-averse investors, parking their hard-earned money into funds whose surplus is allocated among the most volatile segment of the equity market, while also taking risky bets in the debt instruments, is something that can definitely be avoided. It would, in fact, be ideal if portfolios of balanced funds are created in such a manner that they are suitable to meet risk averse investors’ needs.

(The writer is Research Head at, India)


iFAST and/or its content and research team’s licensed representatives may own or have positions in the mutual funds of any of the Asset Management Company mentioned or referred to in the article, and may from time to time add or dispose of, or be materially interested in any such. This article is not to be construed as an offer or solicitation for the subscription, purchase or sale of any mutual fund. No investment decision should be taken without first viewing a mutual fund's offer document/scheme additional information/scheme information document. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Investors should seek for professional investment, tax, and legal advice before making an investment or any other decision. Past performance and any forecast is not necessarily indicative of the future or likely performance of the mutual fund. The value of mutual funds and the income from them may fall as well as rise. Opinions expressed herein are subject to change without notice.
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