Arnav Pandya
Balanced funds usually have a larger exposure to equities while a moderate exposure to debt ensures that there is also an element of stability present in them. The recent times have been good for such funds as they have benefited both boom in share prices as well as the rally in bonds. Hence they are showing performance that is actually the envy of many. Investors need to realise the special conditions that have propelled this performance and the outlook ahead so that they have some realistic expectation from their investments in balanced funds. Here is a closer look at the issue and how investors should deal with this.
Composition
The term balanced fund might make an individual think that the fund has debt and equity holdings in equal proportion but this is not the case. Usually the proportion of equity holdings in the fund is higher because this will ensure that for tax purposes the fund would be classified as an equity oriented fund. This provides tax relief for its investors. The proportion of debt in the portfolio is relatively lower. These funds are more tilted towards equity and investors should keep this in mind. Most funds on an average hold around 68-70 per cent of their portfolio in equities.
Driver of performance
The usual expectation is that the rise in the values of equity will drive the overall performance of the fund. Hence investor should actually concentrate on it. This is true in a sense because the final amount of the gains in the portfolio comes from the performance that is shown by the equity holdings. There is also the importance of the debt holdings as they can be instrumental in actually ensuring that the returns climb even higher if they are able to ensure a strong rise in their value. This is precisely what has happened in the last many months as the debt part of the portfolio has also rallied due to the fall in the yields in the secondary market. This has pushed the overall returns of the funds to levels that one would normally see with equity oriented funds.
Expectations
One of the important things for the investor is that this kind of show should not go on to impact the expectations of the investors going ahead because they need to be realistic. It is likely that this kind of show where both the equity and the debt portfolio performs together is going to be rare as it does not happen regularly. More importantly this might not sustain and a divergence might be visible in the times ahead among the two asset classes. Hence expecting this kind of returns to continue would not be appropriate and it should not be built into the overall expectation of what the funds will deliver for investors going ahead.
The investor should consider the current position as a windfall and be happy with the returns that are generated. This will raise the overall returns for the fund over a longer time period. IT also depends upon the kind of balanced fund that the investor has in their portfolio because there are also funds where there is a higher proportion of debt as compared to equity and these are usually meant for longer term goals like children’s education or retirement. These funds are not classified under the head balanced funds but in a separate category. The structure of these two types of funds with both equity and debt are different. In first category equity exposure is typically more than 65 while in the other debt exposure is around 60% and they should not be compared to each other due to this differing nature.
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