BALANCED FUNDS CAN BE RISKY TOO.

[Based on an article written by Narendra Nathan published in The Times of India dated 09th October, 2017 (Monday)].
When the market is doing fine, some fund managers take extra risk to boost returns, and this includes balanced fund managers as well. As the stock market fell continuously for seven trading days, these balanced funds managers have been caught out. Though the benchmark index Nifty fell 3.13%, several 'safer' balanced fund investors got a rude shock, as their schemes crashed far more.
Why balanced funds crashed? - "Investors opt for balanced funds because they don't want high risk. But in the race to generate returns, unfortunately, some of them don't remain balanced funds", says Tanvir Alam, Founder and CEO, Fincart. Manoj  Nagpal, CEO, Outlook Asia Capital concurs, "Balanced funds have increased their aggressiveness and most of them have allocated close to 75% to equity". Even within equities, balanced funds have opted for the riskier mid-cap stocks. "The majority of balanced funds take mid-cap exposure for better returns and this is another reason for the fall", says Vidya Bala, Head, Mutual Fund Research, FundsIndia. In their bid to chase higher returns, these funds also opted to invest in riskier sectors. "Increased exposure to cyclical sectors instead of defensive sectors is another problem", says Kunal Bajaj, Founder and CEO, Clear Funds.
While the debt part of the balanced fund is supposed to cushion the equity market volatility, it too seems to have raised the volatility for some of these funds. The fall in the debt market, due to concerns around fiscal deficit and the rupee depreciation, has also hurt debt funds. Most medium and long-term gilt funds fell 0.2 - 0.6% recently. Balanced funds managers taking on higher risk with their debt investments has made matters worse for these schemes.
Key Learnings: The first thing that balanced funds' under-performance has shown is that they are not a low risk product, as claimed by most distributors. Most balanced funds have high equity exposure: They need to invest a minimum 65% in stocks to get taxation benefits of equity funds. "The debt portion in balanced funds are meant for the long term", says Bala. Fincart's Alam agrees, "Since one bad year can sink its returns, investors should not get into balanced funds for the medium term (1-3 years)". Since it is a high-risk product, people need to invest slowly-through an SIP or STP.
Most balanced fund sales in the past one year happened on the promise of regular monthly dividends and the advisers who push them as a low-risk product are harming clients' interests", says Bajaj. "Mis-sellings happen in every bull market and this time it has been the dividend-induced sale of balanced funds", says Nagpal.
How to pick the Right Fund? - Most experts recommend less risky balanced funds. "Stick with funds where the equity exposure is kept close to 65%", says Alam. "Since the purpose of getting into balanced fund is to reduce risk, investors should go with large-cap oriented balanced funds and avoid schemes with excessive exposure to midcaps", says Nagpal. Also make sure the fund managers are not taking aggressive bets. Some fund houses that offer two balanced funds, usually manage them differently - one as conservative and another as aggressive. "Funds taking on high risk on both equity and debt will be bad for investors and are best avoided", says Bala.
-Challapalli Srinivas Chakravarthy-
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