All you need to know to retire in comfort

Devansh Mehta, Senior Investment Advisor, IIFL | Mumbai | September 08, 2017 14:49 IST

If we consider a wide gamut of equity-related options available, balanced funds stand out as a lucrative and viable option for conservative investors. These funds have proven to be consistent and safe over the long term period.

We live in an era where lifestyle changes have augmented expenses significantly. Adding to the pinch is the rising inflation. Undoubtedly, the primary aim of any person is to accumulate wealth and retire comfortably without compromising on one’s lifestyle.
It is often seen that people shy away from riskier assets and prefer to invest in debt-related financial instruments such as Bank Deposits, Corporate Deposits, Non-Convertible Debentures and other fixed income instruments. These instruments are preferred as they offer a sense of security and provide stable returns.
Let us take a case study to understand that investing in these assets would surely bring more safety, but these do not help in wealth creation.
Assume that Mr. X plans to retire in the next 15-20 years, and wants to invest in fixed income instruments or similar options like gold and LIC. However, our advice to him would be that investing in these assets would be a safe option as compared to investments in equity, but they do not create wealth. This is because historically equity has given superior risk-adjusted returns over long term.
Now if we consider a wide gamut of equity-related options available, balanced funds stand out as a lucrative and viable option for a conservative investor like Mr. X in the long run. These funds have proven to be consistent and safe over the long term period.
Advantage of Balanced Funds over Debt investments:
  • Balanced funds make more sense than debt instruments for an investor with long term investment horizon.
  • Balanced funds lie in between the risk return cordon of equity and debt funds. These funds invest in both equity and debt securities. As the major allocation is in equity they enjoy equity taxation mandate as well.
  • Balanced funds offer an attractive asset allocation mix to investors seeking capital appreciation from equity market with some stability from investment in debt securities.
  • Balanced funds tend to maintain an asset allocation of 65-75% in equity and 25-35% in debt. The returns are higher as compared to debt mutual funds, but lower compared to pure equity funds. However, they carry higher risk compared to debt mutual funds but lower risks compared to equity mutual funds.
  • Balanced funds are treated as equity funds; hence there is no capital gain tax if the investment period is more than 12 months.
  • Income from Fixed deposit are completely taxable as per tax slab of the investor and in case of debt fund the returns are treated as long-term capital gain if the holding period is minimum 36 months; otherwise, the capital gains are taxed as per investors’ tax slabs.
  • The tax adjusted returns earned from fixed deposits or debt funds are low which do not justify the return borne by the investor.
  • Balanced funds are risky but they also provide superior returns.

Performance of Balanced Funds Vs Different asset classes

For Balance funds we have considered category average | Inflation @6%. | The above returns are pre-tax
The above graph indicates how Balanced Funds have managed to create more wealth over other traditional asset classes. Also, if Rs 10 lakhs remains idle, inflation would destroy its real value and will reduce it to Rs 4 lakhs. However, if it is invested in a Fixed Deposit, the money would grow to ~Rs 28 lakhs as compared to Rs 1.12 Crs if invested in Balanced Funds.
Why we said Balanced Funds with high allocation to equity look attractive?
Let us look at the track record of these funds; they have proven to be a better option for significant wealth creation for an investor who does not wish to take high risk.
We have analyzed 5 year rolling returns on daily basis for different tenures:
Tenure Category Average Remarks
3 Years 14.63 There was no negative return observation
5 Years 14.37 There was no negative return observation
10 Years 15.12 There was no negative return observation
15 Years 15.76 This period saw 3 schemes giving a negative 5 year return for a few dates but overall those schemes also had an average 5 Year return between 11-16% CAGR
 Source: ACEMF| Based on data available of 12 schemes of top 15 AMCs | Returns are CAGR%
The above table clearly shows that if one stays invested in these funds for long term they are bound to reduce risk and volatility significantly and generate excellent returns. In addition, we have also analyzed different ratios which give a significant insight on balanced funds. Let us look at the below table:
Tenure Category Average –
Jenson Alpha
Category Average –
Sortino Ratio
Category Average –
Sharpe Ratio
3 Years 4.72 7.70 4.00
5 Years 6.22 3.23 2.00
10 Years 11.10 3.32 1.39
15 Years 9.38 2.49 1.08
Source : ACEMF | Based on 5 Year rolling return on daily basis for the mentioned tenures and Based on data available of 12 schemes of top 15 AMCs | Risk Free Rate considered for the above calculation is 6%.
We can clearly see that all the three parameters suggest that balanced funds have provided significant risk adjusted returns.
A positive Jenson Alpha shows that the mutual fund manager earned more than enough return to be compensated for the risk he took. Thus, as the investment period increases it is clearly seen that alpha generated is higher as the risk & volatility reduces.
A consistent and positive Sortino ratio suggest that the investment has less probability of incurring a huge loss as it indicates the downside risk ingrained in the fund.
Sharpe ratio is one of the most common ratios to measure the risk-adjusted performance.
Point to be noted: Most of the balanced funds invest 70-75% (minimum requirement is 65% in equities) and the rest in debt securities. Though this does not mitigate risk and volatility, but the expert fund management and diversification of portfolio through debt instruments stabilize returns. Furthermore, the window of investment being more than 3-5 years offers substantial time for capital appreciation, thereby offering favourable returns at a reasonable risk.
Past Performance of our recommended balanced funds:
Scheme Name Corpus
(Rs. Cr.)
1 Y 2 Y 3 Y 5 Y Since Inception
Aditya Birla SL Balanced '95 Fund(G) 10,147.8 14.1 17.7 14.6 18.8 21.0
DSPBR Balanced Fund-Reg(G) 5,336.8 11.8 16.9 14.5 16.8 15.6
HDFC Prudence Fund(G) 29,169.3 14.5 17.7 10.9 18.0 19.5
ICICI Pru Balanced Fund(G) 16,393.8 14.4 17.8 13.5 19.2 15.0
Reliance Reg Savings Fund-Bal (G) 7,799.7 17.7 18.2 13.7 18.2 14.6
 Source: ACEMF | The above returns are as on 7th Sept 2017 and are past performance and not guaranteed return. | Corpus as on 31st July 2017


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