Chethan tweeted out to me asking about ETFs versus mutual funds sometime last week, and I said that I preferred ETFs but if he is just starting out building a portfolio then he should take a look at balanced mutual funds as well.
Balanced mutual funds have a little more than 65% in equity and the rest in debt and cash. The benefit of these type of funds is that they don’t fall as much during market crashes which unfortunately occur quite often in India, and then they benefit reasonably well from rallies, and have performed rather well in India in the past few years. In watching these funds over the years I have felt that they offer the best of both worlds and there are some really good ones out there too so if are starting out then I’d recommend you own some in your portfolio.
Here is the conversation for a little context, and I’ll lay down my thoughts and some good balanced funds after that.
@gischethans Yes, I agree. In India, active MFs have done better than index funds so you should have some of those in your portfolio as well
— Manshu (@Manshu) October 14, 2013
You will notice that my emphasis was on balanced funds and not so much on his original question because I know that he is starting out and I feel that balanced funds are a good way to start out.
They don’t have the same kind of volatility that pure equity funds have and they do tend to rise as much as their pure equity counterparts when the going is good, so they are a good thing to own.
If you are just starting out and see the value of your equity mutual fund down by 30% in a year, that might just turn you away from equity completely. This is not to say that balanced funds won’t fall as much, in fact they do fall quite a lot when the markets are down because there is just no way to escape that but since they have a debt component, there is some cushion.
You may notice how I’m implying that there will be a big fall, and given the nature of markets, I very much believe this to be true. This has been the nature of the Indian markets for very long, and nothing has changed recently to make this go away.
You have to be prepared to deal with declines and balanced funds help with that to some extent without compromising on gains too much.
Here is a graphic illustration of what I’m saying.
I chose BNP Paribas as that came up as CRISIL’s number 1 ranked large cap mutual fund on Moneycontrol, and then I chose the other two balanced funds on random from my earlier post on best balanced mutual funds.
Looking at these graphs you couldn’t tell which ones were equity funds and which ones were balanced funds, and I have included the 5 year annualized returns from these funds at the end to compare the annualized returns and that’s also quite comparable.
I would say there is a definitely a case to own balanced funds before you go into buying any other funds.
As to which funds to buy, the list I did earlier (best balanced mutual funds) has some good names that you can pick from. Hemant also did a great post about balanced funds last year, and he has some names in there that you can look at. I’d highly recommend reading that post as well – Balanced Funds – Best of Both Worlds.
6 thoughts on “Use Balanced Funds to Start Out Investing”
I am single, Male, 28 years living in Bangalore. Save approx 30K per month. Moderate risk taker.
My father is a conservative saver, however I took the plunge into Mutual Funds 2 years back with 5000 SIP per month just to test the waters after analysis online.
Here are the the funds in which I am invested now –
1. HDFC Balanced Fund (G) – 1K
2. ICICI Pru Focused Bluechip Equity (G) – 1K
3. ICICI Prudential Value Discovery Fund – (G) – 1K
4. UTI Equity Fund (G) – 1K
5. Axis Long Term Equity Fund (G) – 1K
I checked my E-CAS statement recently and was happy to see it delivered results of approx 13% overall.
I am a little confident of Mutual funds now, so I have decided to put forth another 10K per month for mutual funds.
This is where I plan to invest –
1. HDFC balanced fund (G)- 2K
2. ICICI balanced fund (G) – 2K
3. SBI Magnum Balanced Fund (G) – 3K
4. Birla Sun Life Bal. 95 Fund (G) – 3K
Want a stable upwards growth, keeping seed money intact.
We need to look at the data carefully. I agree with you completely that balanced funds are the best bet for investors dipping their toes in, however let us also understand:
– Last 5 years have not been great for equity. As of today, the annual return in sensex is 15.9% for the last 5 years.
– If you look at an average balanced fund for the last 5 years, with a 20:80 Debt to Equity ratio in portfolio (on an average), we get 0.2*10% + 0.8*16% = 14.8% which is not way off from the 15.9% Sensex has given. (As of today HDFC Prudence has 75:25 equity and debt split)
In case the market rises spectacularly, you may find that Index funds are a better bet. In the long run costs and dividends matter too. Example this is the 1,3,5,7 and 10 year return for (as of today, source ValueResearch):
NiftyBees: 8.12 1.36 15.79 8.42 15.69
HDFC Prudence: -3.70 0.41 18.33 11.37 18.77
DSPBR Balanced: -0.88 -0.74 12.87 9.58 15.98
In the last one year you may have lost badly with balanced funds.
Yes, if you see a period where the market rises spectacularly, say by 50% then in that year balanced funds would trail, but I’m strongly of the opinion that if you had this kind of a year then another year where the market is down a lot isn’t too far behind. So in the long run it would balance out.
Manshu ji, I know that HDFC Prudence has given good returns in long run for more than 10 years, but what about HDFC Balanced funds and ICICI Balanced funds which were good funds onece upon a time. How we can ensure we invest in proper funds which would perform well in next 20+ years. Now they may perform better after when we want, we may get low returns. Any thoughts ????
Well there is really no way to totally weed out such funds, you have to hope that you are in one of the better funds, not the best one, that is hardly ever possible. I go by past record, consistency in performance, and that usually helps.
yes, you said very true. We can only hope.. and moreover, hope for the better not the best.