The case for balanced funds

This lack of confidence could arise of out their bleak understanding of equity as an asset class.

Sep 23, 2014 04:09 IST ICICI Prudential AMC Nimesh Shah |

Nimesh Shah, MD & CEO, ICICI Prudential AMC
A general tendency of Indian investors is to invest in equity when the markets are surging high, while pull out money when the markets are underperforming- which may not necessarily lead to the best investment experience. Also, more often than not, in times of market volatility some investors either stay put or panic-sell their investments.
 
This lack of confidence could arise of out their bleak understanding of equity as an asset class. It is apt to mention here, that equities is a suitable investment for long term wealth creation. One should ride the short-term volatility with patience in order to benefit from the potential capital appreciation in the long-term.
 
Now with equity markets perched at record highs, certain segment of investors must be waking up to realize that they have been bereft of the upside so far.It may be a prudent strategy to add flavor of balanced funds. These funds seek to capture upside by increasing allocation to equity when the markets are declining, and limits downside by reducing exposure to equities when markets are rising- completely reverse of what retail investors normally do.
 
ICICI Prudential Balanced Advantage fund is an interesting offering in this space. Also for Investors who do not wish to take too much risk, but wish to have exposure into equities, balanced funds are a good way forward. These funds are less volatile, and when the markets fall, they are less hurt than others.
 
Adherence to asset allocation model
 
Investing in balanced funds, offers the benefits of asset allocation modelin a single structure.Adhering to asset allocation, spreadsinvestments across more than one asset class thereby reducing risks and moderating the effect of an individual asset class on the overall portfolio performance. It also instils discipline in investing and helps avoid the tendency to redeem at market bottoms and invest at market tops.
 
However, managing debt and equity separately could be a tedious task involving churning costs, tax implications and expertise. Further, one may not be able to tactically adjust allocations to market movements. Balanced funds offer the growth of equity and the stability of debt. This diversification protects the portfolio from downside risks if either equity or debt enters a bearish phase.
 
Tax efficiency
 
Having an average exposure of 65% to equities, allow balanced funds to be taxed like equity funds. Therefore, these funds enjoy tax-free returns if the holding period is greater than a year; otherwise, they are subject to short-term capital gains tax except for dividend option.
 
In case of a dividend option, the dividends paid and received are tax-free (without any dividend distribution tax) irrespective of the holding period. For funds with an average exposure lower than 65%, the tax treatment is similar to that of debt funds.
 
Points to ponder
 
Investors with moderate risk profile and investment horizon of over three years could look at investing in balanced funds. On the equity side the fund is managed actively based on valuations in the market, as the portfolio is constructed keeping in mind the conservative risk profile of investors. This could also be a product for maiden investors to start off with, owing to Lower volatility and tax benefits.Being an evergreen product that works across market cycles, and offering the benefits of asset allocation, this product could form part of investor’s core portfolio.
 
The author is MD & CEO, ICICI Prudential AMC

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