What Ails Balanced Funds?

Joydeep Sen
The basic positioning of Balanced Funds, now known as Aggressive Hybrid Funds after the new categorization norms, remains same as earlier: 65% or more is invested in equity, taxation is that of equity funds and shuffling of portfolio allocation is tax efficient i.e. mutual funds per se are tax-free entities.

 The basic positioning of Balanced Funds, now known as Aggressive Hybrid Funds after the new categorization norms, remains same as earlier: 65% or more is invested in equity, taxation is that of equity funds and shuffling of portfolio allocation is tax efficient i.e. mutual funds per se are tax-free entities. However, going by the gauge of AUM in this category, there has been a significant movement in corpus.

As on March 2015, the AUM of Balanced Funds was Rs 26,368 crore, representing only approx 2% of the industry AUM of Rs 10.8 lakh crore. As on March 2016, it went up to Rs 39,146 crore, representing approx 3% of the industry AUM of Rs 12.3 lakh crore. As on March 2017, the AUM of Balanced Funds went up significantly to Rs 84,763 crore, representing a more sizable approx 5% of the industry AUM of Rs 17.5 lakh crore. And it does not stop there. As on March 2018, it was Rs 1,72,151 crore, which is approx 8% of Rs 21.4 lakh crore. You would expect the stellar rise to continue right? This fund category must the doing something right. As on February 2019, it is Rs 1,72,783 crore, which is approx 8% of industry AUM of Rs 23.1 lakh crore. The numbers are at market valuation of that day, so give and take a little bit, but broadly the trend is visible. The upward march of this category has stopped.

Somewhere down the line, one factor that contributed to the stellar growth of the category was a particular sales approach by certain sections in the ecosystem, which may be termed as dubious. The pitch was that it gives 1% dividend every month i.e. 12% dividend every year, plus capital appreciation. Un-savvy investors lapped up the idea: something that would give regular inflows, capital appreciation and equity taxation. As long as the market was booming it went on fine; when the market corrected, the chain broke. Now that the ‘1% dividend every month’ is not there, that questionable sales approach has stopped. This has led to stabilization in AUM in the category, as the sales happening now are the regular ones.

To conclude, the takeaways for investors are: (a) dividend in a mutual fund is not income; if it is not paid out to you, it remains in the fund which you can avail by redemption (b) mutual fund is not for regular dividend, but for long term wealth creation (c) if you require regular cash flows e.g. if you are a retiree, you should do a systematic withdrawal plan (SWP), not wish for dividend pay-outs and (d) nothing has changed in Balanced Funds; Aggressive Hybrid Funds are mandated to maintain 65% to 80% of the fund in equities. You may prefer to allocate yourself, to equity and debt funds e.g. large cap / small cap / long term / short term, etc. If for some reason you invested in Balanced Funds earlier, the same offer is there on the shelf.

[Disclaimer: The author is Founder, wiseinvestor.in. The views and opinions expressed in this article are those of the author and do not necessarily reflect that of Business Television India (BTVI)]