Equity-oriented balanced funds have outperformed large-cap funds across one, three, five & 10-year periods

 

Investors would have made more money in mutual fund schemes that invest in a mix of stocks and debt rather than products betting only on blue-chips in the last 10 years. Equity-oriented balanced funds, which invest 65% of their corpus in equities and the balance in debt instruments, have outperformed large-cap funds in periods of one, three, five and 10 years.

In the last three years, balanced funds have returned 15.65%, while large-cap schemes have fetched 13.13%. For the five-year period, returns from balanced funds were 9.75% against 6.7% from large-cap funds. The category has returned 9.7% in the last 10 years against 8.46% by large-cap funds.

Equity-oriented balanced funds maintain their equity allocation between 65% and 75%. So when the markets go up, the equity allocation increases and the fund man ager is forced to trim it. "These funds automatically sell highs and buys lows," says Pradeep Gokhale, senior fund manager, Tata Mutual Fund. Large-cap funds remain invested in equities only , and, hence, have underperformed.

Some believe the debt component has enabled these funds to outperform. The debt component consistently delivered 9-10%, while equities lagged behind, which helped their outperformance.

As a result, balanced funds fell less than large-cap schemes in the past year. Balanced funds have lost 3.82% in the past year, while largecap funds have lost 10.84%.

As per distributors, high volatility in equities is driving retail inves tors to balanced funds.

Data from AMFI show balanced funds have seen an inflow of `19,665 crore during the financial year compared to `8,335 crore in the previous financial year. The assets under management (AUM) of balanced funds have surged to `39,104 crore compared with `26,507 crore a year back.

Investors look at funds like L&T India Prudence Fund, SBI Magnum Balanced and Tata Balanced fund, for a time frame of three years and above.

With valuations high and earnings taking time to recover, wealth managers are recommending firsttime investors to invest through balanced funds.

The Nifty is trading at a PE of 20.73, while the Nifty Midcap 150 trades at a PE of 27.09. Balanced funds have a lower volatility than plain vanilla equity mutual funds because of their exposure to debt.

Tax benefits are another reason for increased flows into balanced funds. Post the new tax rules for debt funds, investors in the high tax bracket are putting money in this category as these funds are treated as equity funds from a tax perspective.