On an average in the past 5 years, Balanced Mutual Funds have returned 12 percent annually. This is more than 10 percent returns given by large cap funds and 8 percent returns by the Sensex in this time frame. In fact, the top performing Balanced Funds have returned more than 15 percent annually in the past five years.
Balanced Funds usually invest 65-70 percent of the corpus in equities while the rest goes in debt. The debt component goes into highly rated corporate papers and gilts. Compared to pure equity fund which bears a higher riskier component due to increased investment in equities, the protective cushion provided by the debt part of the portfolio, ensures that the fund is in good stead during the upswing as well as downswing. Thus when you invest in a balanced fund, you are able to benefit from risk adjusted returns and reduced volatility.
Another benefit of a balanced fund is that you don’t have to worry about selling when the market is up or buying when it is down. These funds stick to their allocation in all conditions; the automatic rebalancing helps significantly in reducing the risk attached to the fund.
How much part of the portfolio will be be invested in equities in a balanced fund?
Usually, a fund manager arrives at this figure by making use of Price to Book Value (P/BV) and other valuation models in which the present market levels are matched against the fair value range (balanced and impartial estimate of the potential market price of an asset) to check if the market is overvalued or undervalued. A P/BV which is lesser than the fair value calls for an increase in equity levels and vice-versa.
Since investors who invest in a balanced fund have a conservative risk profile, the portfolio is created in such a manner. These funds usually avoid companies with high valuations and many of the companies that are in the portfolio are the large-caps that enjoy predominance in the Sensex.
How to choose the right balanced fund?
The category of balanced funds is a crowded one with many funds, which makes it a little tough to select the best one. Here are some tips-
1. Look for the returns of the fund in terms of consistency in performance for the past 3, 5 and 10 years.
2. The fund house that offers the fund, should be of a credible parentage.
3. Find out who is the fund manager and his/her years of experience with the fund house.
4. Look for the performance of the fund through various market cycles to understand how it braves volatility.
5. Check out the expense ratio of the fund. While it should not matter if the performance of the fund is fantastic, it makes no sense in opting for a fund with high expense ratio when the one with a lesser one, is a better performer.
A balanced fund is an ideal fund which carries a combination of growth through equities and stability through debt.