Fund Review Are balanced funds taking too much risk to deliver performance?

Are balanced funds taking too much risk to deliver performance?

Many balanced funds have more than 30% exposure to mid and small cap stocks which helped them deliver superior returns; however, with higher risks.
Nishant Patnaik Jan 5, 2016

Balanced funds are the flavor of the season. This is evident by 69% jump in the assets under management in this category, which went up from Rs.22,700 crore in November 2014 to Rs.38,600 crore in November 2015.

In fact, the AUM of a few schemes like ICICI Prudential Balanced Advantage Fund, Tata Balanced Fund and L&T Prudence Fund have witnessed a massive jump in their AUM in the past one year. While ICICI Prudential Balanced Advantage Fund has received inflows of close to Rs.5,500 crore, the AUM of Tata Balanced Fund and L&T India Prudent Fund went up by Rs.3,600 crore and Rs.950 crore respectively.

One of the reasons for the rapid growth witnessed by this category is due to the changes in tax structure of debt funds in FY 2013-14. 

Another key reason behind this trend is spectacular performance. Value Research data shows that balanced funds have delivered 4%, 14% and 11% over one, three and five year period. Interestingly, balanced fund category has delivered better returns than diversified equity funds category, which delivered -2%, 12% and 7% over one, three and five year period.

Typically, balanced funds deploy 65% in equities and rest in debt instruments. Also, a majority of balanced funds have mid-cap bias. In fact, a few balanced schemes have over 40% exposure to mid and small cap stocks. This strategy helps fund houses deliver superior returns; however, with higher risks.

Manish Gunwani, Deputy-CIO, ICICI Prudential AMC said, “There are multiple reasons for this trend. Firstly, mid-caps have outperformed large caps and balanced funds had a higher allocation to mid-caps which helped this category. Also, equity has not delivered in the last one year. Consequently, the allocation to cash or debt has actually worked in favor of balanced funds. We do not think balanced funds are taking higher risks to deliver this performance.”

Another fund official who didn’t want to be named believes that there is no harm in taking some risk. “As debt component in balanced funds reduces downside risk, we can maneuver equity portfolio to deliver better performance. There is no harm in doing it. Also, if we see any sign of worry in the mid and small cap space, we can change the composition of the fund to reduce risk.”

However, some officials have a different view. Nilesh Surana, Head-Equities, Mirae Asset had earlier told Cafemutual that balanced funds should aim to deliver risk-adjusted returns to investors. “Balanced funds are typically meant for investors having low risk appetite. Putting their money in mid and small cap funds doesn’t justify the scheme’s objective. Though large cap stocks usually deliver slightly lower returns as compared to their mid and small cap counterparts, it reduces downside risk in bear market.”

A senior official from a foreign fund house said, “For the past few years, we have seen a few balanced funds delivering aggressive returns just like equity funds. However, no one has raised questions as to why these funds are delivering such returns. Balanced funds are meant for investors having low risk appetite.”

In order to deter fund houses from launching me too schemes, SEBI has become stringent in giving go ahead to new balanced funds unless they come with a differentiating factor. As a result, a few fund houses have come out with balanced funds having low risk. Some recent examples of such low risk balanced funds are JP Morgan Balanced Fund and Mirae Asset Prudence. While JP Morgan Balanced Advantage Fund has exposure to arbitrage opportunities, Mirae Asset Prudence Fund has bias towards large cap stocks. Apparently, both these schemes have got SEBI approval after a year.


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