After a spectacular run, inflows in balanced funds fall for the second consecutive month

Balanced funds had a spectacular run in 2017. This category that gained investor interest on the back of tax-free regular dividends and attractive returns at lower risk. Also with the markets looking stretched, many advisors have advised their clients to look at balanced fund.

However, the inflows have declined in the balanced funds have decreased in the last two months – January and February.    

Net inflows in the balanced category was at one-year low of Rs.5,026 crore in February and Rs.7,665 crore in January.

AMFI data shows that the underlying factor behind the decline in inflows in balanced funds is not the same. In January, the decline in net inflows was mainly on account of redemption while the sales figure dropped in February.

Experts say that the fall in inflows in balanced funds in January is mainly due to the cautionary approach taken by the investors ahead of the Union Budget 2018 and proposal of dividend distribution tax in the following month.

“Inflows in balanced funds fell in Jan 2018 amid soaring valuations and as investors remained cautious ahead of the Union Budget 2018-19. The trend continued after the imposition of 10% dividend distribution tax on equity-oriented schemes and 10% LTCG tax on returns from equity,” said Karthik Srinivasan, Group Head- Financial ratings, ICRA.

Vidya Bala, Head of Mutual Fund Research, Fundsindia believes that the fall in net inflows is clearly the effect of the proposal of the introduction of DDT in equity funds. “The regular dividends made investors believe that they are income-generating funds. Many investors invested in balanced funds to get regular dividends, the sheen of which has reduced after the budget,” Vidya said. 

However, few experts had said that the surge in the balanced funds was on account of mis-selling which was likely to reduce after the Budget proposal.  

Ashish Somaiya, CEO, Motilal Oswal MF had said in a post budget note that DDT on equity oriented mutual funds will help stop mis-selling of balanced funds that declare a monthly dividend. “Mis-selling has meant that the average balanced fund size is now Rs.5,092 crore vs average equity large-cap fund at Rs.2,072 crore. The biggest mistakes are made when something which embodies risk is presented as low risk under the garb of regular tax-free dividends. Tax on dividends will surely preclude one such misrepresented carrot in the offer. The funds may still continue to declare monthly dividend its just the attractiveness of the dividend would decline,” he said.

However, Karthik feels that despite the fall in inflows, funds to balanced funds will remain strong. “Since balanced funds own both stocks and bonds, the merit in investing in them will remain strong amid rising bond yields. The outlook remains favourable as asset allocation is done by professional fund managers in balanced funds and reduces risk to some extent,” said Karthik.

Inflows in balanced funds

Source: AMFI