Time to call your Balanced Fund Manager - and redeem!

1 OCTOBER 2018

Some people don't get it.

The collapse of Lehman and the Financial Holocaust is barely 10 years in the past - and, like goldfish, the gullible wait for the guillotine to crush their savings.

They continue to be misled, to be lied to, and to be ripped off.

But they remain loyal to 'the brand'.

Or people tend to have blind faith in 'aapro' good Gujarati/Marwari/Punjabi/Sindhi who runs or owns the fund house or financial conglomerate.

For those 'bhakts' who prefer caste to literacy, my very best wishes.

For the rest of us who prefer living in a world of meritocracy and professionalism, here is some more proof that - of all the branded Balanced Funds out there - most were high-risk equity products that carried a wrapping paper which had 'Balanced' written on it.

And the red ink they used to write the word 'Balanced' - that was written with the blood they sucked out of you and paid for by the fiction they sold you.

In November 2017, I wrote "Balanced Funds are Unbalanced" and in March 2018, I followed that up with "Is it time to redeem your balanced fund".

The responses to the article were that:

  • it was a small sample size (I took those balanced funds with the largest AuMs, so I went for sample AuM rather than number of schemes and also to show you how some large fund houses are happy to dupe you); or
  • that a closer look at the equity portfolio would suggest they were tilted towards high-beta midcaps (really!! That is like mixing vodka with whisky and rum!! How is that balanced?? It proves my point!); or
  • that an investment with a fixed monthly return may underperform sometimes (gosh, better give SEBI the name of the person who told you that a balanced fund generates a fixed monthly return!)...

A balanced fund is supposed to serve a very simple dual-objective: (a) Don't lose my money, (b) try and make me a little money.

The CEOs, CIOs, and fund managers of Indian mutual funds CEOs - with their eyes fixed on higher AuMs that would result in potentially higher IPO valuations of their ESOP shares - brought you to the slaughter house of gathering assets.

A higher AuM game gives their ESOP shares potentially more value.

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What happens to you after the IPO is over is of no interest to them - they will have retired and encashed what they had to encash.

The CIOs and fund managers, who question companies on corporate governance with great zeal, were hooked on to this AuM-focus game. They, too, have ESOP shares ready for a price spurt during the IPO. They are not going to waste their time worrying about what is correct for you.

They Indian financial services industry has learnt from the Masters of the Universe of Wall Street: IBG YBG.

I'll Be Gone; You'll Be Gone.

The CEO will be gone, the CIO will be gone, the fund managers will be gone.

And you, dear investor, will be unbalanced and tottering; carrying the baggage of the mis-sold product.

So, using the same balanced funds which I had used in the earlier two articles, (small sample size, but I took the large ones!), let's see how they performed.

Table 1: Tipsy from too much equity? Names have changed, but not the character

Index / Balanced Fund AuM of the Fund as of Aug 31, 2018 (Rs crore) Return (%) Period Jan 01, 2018 to September 26, 2018
BSE 30 Index (as on 26-Sep-2018) 36,542.27 8.07
Quantum Multi Asset Fund 15.93 3.34
HDFC Balanced Advantage Fund (Erstwhile HDFC Prudence Fund) 39,215.18 -3.64
ICICI Prudential Equity & Debt Fund (Erstwhile ICICI Pru Balanced Fund) 29,032.28 0.28
HDFC Hybrid Equity Fund (Erstwhile HDFC Balanced Fund) 23,136.61 -3.02
Aditya Birla SL Bal Advan Fund 3,227.94 -0.15

Note - Returns less than a year are in absolute terms,
Source - Bloomberg, ACE MF, PersonalFN Research

The ICICI Pru Fund preserved some capital. Aditya Birla Sun Life lost a bit. HDFC's 2 funds with Rs. 62,000 crore did not do well and lost you over -3%.

But, hey, they had a very successful IPO of HDFC AMC.

That was possible partially due to the fact that Rs 62,353 crore of AuM in these 2 HDFC balanced funds accounted for approximately 21% of the Rs 2,92,000 crore of total AuM of HDFC AMC. This large pool of money in their balanced funds probably added about Rs 6,000 crore to HDFC's market cap. Though it knocked out Rs 1,800 crore from your pocket if you were an investor!

Or, to look at it another way, of that Rs 1,100 IPO price - about Rs 200 was due to the AuM in these balanced funds...

So, the sellers of the stock in the IPO - and the management team that owns the ESOP shares - benefitted to the extent that they had this higher AuM from you.

And you, the investor in the fund product, own a HDFC balanced fund that lost you money this year.

That sounds like a wonderfully good relationship.

You invest in a product that fails to do what it is supposed to do (give you "balance") and you lose money.

The person who sold you the product makes even more money because they got you into a bad product!

If you like that kind of equation in life, Stay Happy and Stay Blessed,

Or ask questions!

Step back and think about what just happened.

Should you have been in a liquid fund?

Or bank deposits?

And earned a positive return?

Or in the balanced fund of another fund house that "protected" your capital on the downside?

Table 2: But they have given you superb returns? Beware: Balanced funds surging more than and Index may be signs of danger and excessive risks, not brilliance!

Index / Balanced Fund Return (%) Period Jan 01, 2018 to September 26, 2018 Return (%) Period Start date of QMAF to September 26, 2018
BSE 30 Index 8.07 12.59
Quantum Multi Asset Fund 3.34 9.56
HDFC Balanced Advantage Fund (Erstwhile HDFC Prudence Fund) -3.64 14.35
ICICI Prudential Equity & Debt Fund (Erstwhile ICICI Pru Balanced Fund) 0.28 16.92
HDFC Hybrid Equity Fund (Erstwhile HDFC Balanced Fund) -3.02 15.57
Aditya Birla SL Bal Advan Fund -0.15 11.94

Returns less than a year are in absolute terms, while over year are compounded annualised Quantum Multi Asset
Fund's (Direct Plan) inception: July 11, 2012
Source - Bloomberg, ACE MF, PersonalFN Research

The mutual fund industry was always playing a game of AuM - now they have added a googly called ESOP value of shares given to key management teams. ESOPs are great vehicles for transferring stewardship of institutions across generations. But they can, in the hands of the less scrupulous, be used as a kukri to decimate your wallet.

A balanced fund is supposed to protect your downside risk when the markets fall - and markets can fall.

In a market cap game, equity-related AuMs are the most valuable.

What was sold as balanced funds were actually equity funds.

You were suckered into these unbalanced equity funds because there was a tax break ( >65% of equity allocation in any mutual fund product gets a tax break) and it worked well for the game plan of maximising ESOP value.

You are the blindly devoted bhakt who was sacrificed for the IBG YBG: I'll Be Gone, You'll Be Gone.

Redeem. Now find a truly balanced fund that does what it is supposed to.

PS: 15 September 2018. The world remembered the biggest financial bankruptcy in history: Lehman Brothers. But you did not hear the entire story. That's because the full story - it was a Financial Holocaust - was hidden from you...but no longer. For the full story about what happened that fateful day 10 years ago, and since, read Ajit Dayal's exclusive report - A Financial Holocaust Eliminated from History.

Suggested allocation in Quantum Mutual Funds (after keeping safe money aside)

Quantum Long Term Equity Fund, Quantum Equity Fund of Funds, Quantum ESG India Fund Quantum Gold Fund
Quantum Liquid Fund
Why you
should own
An investment for the future and an opportunity to profit from the long term economic growth in India A hedge against a global financial crisis and an "insurance" for your portfolio Cash in hand for any emergency uses but should get better returns than a savings account in a bank
Suggested allocation 80% in total in both; Maybe 15% in QLTEF and 75% in QEFOF and 10% in Q ESG 20% Keep aside money to meet your expenses for 12 months to 3 years
Disclaimer: Past performance may or may not be sustained in the future. Mutual Fund investments are subject to market risks, fluctuation in NAV's and uncertainty of dividend distributions. Please read offer documents of the relevant schemes carefully before making any investments. Click here for the detailed risk factors and statutory information"
Disclaimer: The Honest Truth is authored by Ajit Dayal. Ajit is Founder of Quantum Advisors Pvt. Ltd. which is the Sponsor of Quantum Asset Management Company Pvt. Ltd – the Investment Manager of the Quantum Mutual Funds. Ajit is also the Founder of Quantum Information Services which owns Equitymaster and PersonalFN. The views mentioned herein are that of the author only and not of Quantum Advisors, Quantum AMC or Equitymaster. The information provided herein is compiled on the basis of publicly available information, internally developed data and other sources believed to be reliable by the author. The information is meant for general reading purpose only and is not meant to serve as a professional guide / investment advice for the readers. Readers are advised to seek independent professional advice and arrive at an informed investment decision before making any investment. Whilst no specific action has been suggested or offered based upon the information provided herein, due care has been taken to endeavour that the facts are correct, accurate and reasonable as on date. None of the Author, Quantum Advisors, Quantum AMC, Equitymaster, their Affiliates or Representative shall be liable for any direct, indirect, special, incidental, consequential, punitive or exemplary losses or damages including lost profits arising in any way on account of any action taken basis the data / information / views provided in The Honest Truth.

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2 Responses to "Time to call your Balanced Fund Manager - and redeem!"

manoj rathore

Oct 5, 2018

ajit, it is sad that you have used 9 months data to trash your rivals. if a balanced fund's mandate permits it to invest substantially in equities, and the manager does that, there is nothing wrong with it. it is for investors to decide if they want to invest in the fund or reject it. that is the fund's profile--take it or leave it. just because you disagree, does not make it wrong. there is nothing sacrosanct about your opinion/belief on how to manage a balanced fund. fyi, several of the funds you have slammed have delivered better than your fund over 5 years. sour grapes perhaps?

Like (1)

Piyush Bhargava

Oct 1, 2018


I agree with you that their is always risk in investing please guide for small investor like me where should in invest to get better return above then bank FD, i have my investment in direct equity also.

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