Balanced Funds are Unbalanced! - The Honest Truth By Ajit Dayal

Balanced Funds are Unbalanced!

18 NOVEMBER 2017

The myths being spread to draw money into equity funds are alarming.

While a long-term "bull" on India and a believer in the fact that investments in the stock markets will go a long way in creating wealth, I worry about the incorrect messaging that passes on as "advice".

Or, as President Trump would tweet, "fake advice"...

Apparently some investors have been told:

  1. Fixed Deposits are not giving you any return, (TRUE)
  2. Invest the money you have in FDs in a balanced fund - it is safe (A BIG LIE)

Anything that has to do with equity markets cannot be "safe" and is far riskier than an FD.

Stocks give you a higher rate of return because there is more risk.

FDs give you a lower rate of return because there is less risk.

That is one of the basic laws of finance: the return you should expect is a function of the risk you take.

Over longer periods of time, stocks have done well and compensated you for the risks you have taken.

But, you can never say that stocks are less risky than FDs.

And you can never say that balanced funds are "safe".

They are not: because every balanced fund invests in stock markets and stocks, as I indicated above, are more risky than FDs.

FDs do not decline in price or value when a stock market falls - balance funds do decline in price and value when stock markets fall.

The drink is laced with high octane stuff.

A good way to test how balanced a Balanced Fund is to see how it behaves in a market downturn.

As Table 1 indicates, in the market downturn in January and February 2016, the popular balanced funds did not really protect your "downside". They behaved like the person at the bar who has had a little too much than the body's capacity to absorb alcohol! If you bought the Balanced Fund for "downside protection", it failed you.

Table 1: Tipsy from too much equity?
Index / Balanced FundAuM of the Fund as of Dec 30, 2016 (Rs crore)Return (%) Period Jan 29, 2015 to February 12, 2016Return (%) Period Dec 31, 2015 to Feb 29, 2016
BSE 30 Index26,626.5-21.82-11.93
Quantum Multi Asset Fund8.6-2.28-3.28
HDFC Prudence Fund14,953.3-17.57-15.55
ICICI Prudential Balanced Fund5,097.9-11.55-10.21
HDFC Balanced Fund 8,312.7-11.32-10.81
Aditya Birla SL Bal Advan Fund135.8-9.70-10.81
Note: Returns less than a year are in absolute terms, while over one year are compounded annualised; Quantum Multi Asset Fund's (Direct Plan) inception: July 11, 2012
Source; Bloomberg, ACE MF, PersonalFN Research

A similar story holds for the recent decline in the stock market from August 1, 2017 to August 11, 2017: many balanced funds declined sharply as if they were equity funds!

Table 2: Still drinking at the bar?
Index / Balanced FundAuM of the Fund as of Dec 30, 2017 (Rs crore)Return (%) Period Aug 1, 2017 to Aug 11, 2017
BSE 30 Index30,921.6-4.18
Quantum Multi Asset Fund10.9-0.79
HDFC Prudence Fund26,092.0-3.67
ICICI Prudential Balanced Fund14,242.7-2.86
HDFC Balanced Fund 12,483.4-2.91
Aditya Birla SL Bal Advan Fund1,455.9-0.56
Returns less than a year are in absolute terms, while over one year are compounded annualised; Quantum Multi Asset Fund's (Direct Plan) inception: July 11, 2012
Source: Bloomberg, ACE MF, PersonalFN Research

However, Balanced Funds are supposed to give you "upside" because they have taken more risks by being in equity and other asset classes (bonds, gold). Their returns are meant to be better than the FD rate of return.

And they have given you stellar returns.

For this current calendar year, HDFC Prudence has beaten the BSE-30 Index while ICICI and HDFC Balanced have come pretty close!

For the period since QMAF was launched July 11, 2012 all the four funds have dramatically outperformed the Index! QMAF has not.

That is amazing.

Table 3: But they have given you superb returns!
Index / Balanced FundReturn (%) Period Jan 1, 2017 to October 30, 2017Return (%) Period Start date of QMAF to October 30, 2017
BSE 30 Index24.9412.88
Quantum Multi Asset Fund 11.01 10.47
HDFC Prudence Fund 25.9917.75
ICICI Prudential Balanced Fund22.0219.79
HDFC Balanced Fund23.7618.78
Aditya Birla SL Balanced Advan Fund13.9614.17
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

You are buying a product which is meant to give you downside protection (which it fails to do) and you are being given a product that gives you a huge upside.

This is mis-selling, in my opinion.

The funds have a wrong label: they should be called equity funds, not balanced funds.

Note that, the Quantum Multi Asset Fund has given you a rate of return that is lower than the BSE-30 Index but it has protected your downside when the markets declined (Table 1 and 2); though, overall QMAF has given you much lower gains than the other large Balanced Funds from the time QMAF was launched on July 11, 2012 (Table 3).

QMAF does what it is supposed to do: protect your downside when the markets decline and aim to give you a better return than a 3-year or 5-year FD would - that is the objective; not beating the BSE-30 Index!

Hiding from the tax man - and putting your capital at risk?

The other Balanced Funds always have an allocation of more than 65% in equity shares. They are doing this to give you a better tax treatment.

A balanced fund which always has more than 65% of its corpus invested in equity is treated as an equity fund. If you hold these balanced funds for more than 1 year then any capital gain is free of tax.

By the way, that is also true for a pure equity fund.

In a balanced fund you are buying safety - but they are producing higher returns, lower taxes, and more risk.

What you get may not be what you thought you were supposed to get.

If you really want higher returns, invest in a pure equity fund - not a balance fund. If you want more safety for some of your money but a chance to make a little better return then maybe look for a pure balance fund: one that does not mind a lower exposure to equity and a less advantageous tax treatment but will not compromise on the objective of being "balanced".

As an investor in QMAF and in equity funds, I know the clear objectives:

  1. Growth from investing in stocks must come from my equity fund investments;
  2. Protection of my capital - and a desire to earn more than the low FD rates - must come from my investment in QMAF or other truly balanced funds.
Table 4: Simple pocket-book guide

Where the money isWhere it could beInstrument / Products to consider
Money at homeLeave it there, I may need money on a day when the bank is closed or the ATM has run out of notesIn many denominations, just in case...
FD - from 1 month to 3 yearsI need the money for a known reason and do not wish to take any chances! Return is not my objective, safety is my only objective.PSU Banks and maybe very short term Liquid Funds which invest only in government and PSU-securities; they should not invest in private sector companies
FD - 3 year and moreI need the safety but since the rates of FD are low, I am willing to take very little risk to try and get a better return than the FDs over this longer time frame of 3 years and moreA true Balanced fund like QMAF, not what you are being made to buy! See Tables 1 and 2 above to remind yourself why there is little protection when stock markets decline from the balanced funds you may own; you did not buy the balance fund for a tax break! You bought it for safety!
Money I need to invest for a very long term need like buying a home, a marriage, children, education...or just to get rich!The best asset class for the long run! It has risk. There can be years when stocks lose you money but, over very long time periods, if you make some sensible choices you are likely to make money and be more than compensated for the risks of being in equityMany equity funds that fit this profile; but there are some that do not: do your homework! However, if you want a quick solution here are 2 to consider in a 10% to 90% mix:
  1. Quantum Long Term Equity Fund, 10% of your allocation to equity mutual funds, and
  2. Quantum Equity Fund of Funds, 90% of your allocation to equity mutual funds

Money I need against insurance that society will go nuts; that the world will be in troubleNeed to have gold at home, gold in a locker, and gold in an ETF. The same way you would have money in your wallet, money in your cupboard, and money in your FDs.Make sure you have gold with the highest purity possible and that your Fund or ETF also maintains that rule; it is the easiest gold to transact.
Disclaimer: I helped create the Quantum range of mutual funds;

The next time you are recommended a balanced fund, use the dates selected in Table 1 and 2 and ask the person who recommends a balance fund to you to give you the returns of that suggested fund for those specific dates.

Armed with that knowledge, you will know whether you are buying "safety" and protection on the downside or whether you are buying the risk of yet another equity fund.

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

Quantum Long Term Equity Fund and Quantum Equity Fund of Funds 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 20% in QLTEF and 60% in QEFOF 20% Keep aside money to meet your expenses for 6 months to 2 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 and Quantum Asset Management Company Pvt. Ltd. The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and has not been authenticated by any statutory authority. The author, Equitymaster, Quantum AMC and Quantum Advisors do not claim it to be accurate nor accept any responsibility for the same. Please read the detailed Terms of Use of the web site.

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3 Responses to "Balanced Funds are Unbalanced!"

Kunwar Narayan

Nov 24, 2017

True. But balanced Funds offer an excellent tax management solution. one can hold 30% debt (indirectly) tax freee. Debt Fund would have LT tax at 20% (indexed).

Eg a person wanting to go 60% Equity 40% debt can look at
20% pure equity
55% balanced
25% debt.

Gets to 60:40, but is more tax efficient. Matters if you put in 10Cr. could save 4-5lacs annually in the pure tax arbitrage.

Like (5)


Nov 22, 2017

How safe are Debt funds which are into Private and goverment bonds.

Like (5)

Joseph Erinjery

Nov 19, 2017

If most balenced are not truly balenced, what about low risk Equity savings funds like Hdfc equity savings fund, Reliance equity savings fund which invest 33+ 33+34
Pls advice

Like (9)
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