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Best Balanced Mutual Funds in 2017 - Outside View by PersonalFN

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Best Balanced Mutual Funds in 2017
Dec 2, 2017

As the market scales to new highs, investors become wary. During such times, distributors, advisors, and at times even mutual fund houses aggressively push balanced mutual fund schemes.

And investors are encouraged to seek out the best balanced mutual funds.

Unfortunately, when it comes to pick the best mutual fund schemes, investors tend to give a high weightage to recent performance and star ratings. This is why schemes with the best returns over the past 1-year or 3-year periods tend to gain the maximum inflows from investors.

Net Inflows in Balanced Funds In the Past One Year

Over the past one year, the net inflows into balanced mutual fund schemes have more than doubled. From around Rs 3,000 crore a year ago, the net inflow nearly tripled to Rs 9,000 crore in August 2017, before moderating to about Rs 6,000 crore in October 2017. In March 2017, net inflows into balanced funds even outpaced equity diversified funds. Clearly, investor participation has grown multi-fold.

Several balanced schemes have burgeoned in size. As many as 6 schemes have crossed assets of over Rs 10,000 crore each.

PersonalFN takes a deeper look at the best balanced funds of the past year. Though these schemes have delivered spectacular returns, are they worth your investment?

Best Balanced Funds Based On 1-year Performance
Scheme Name 1 Year* (%)
BOI AXA Mid Cap Equity & Debt Fund 38.37
Principal Balanced Fund 33.18
Mirae Asset Prudence Fund 26.53
HDFC Prudence Fund 25.49
L&T India Prudence Fund 25.02
Baroda Pioneer Balance Fund 24.88
HDFC Balanced Fund 24.25
ICICI Pru Balanced Fund 23.83
UTI Balanced Fund 23.38
Aditya Birla SL Balanced '95 Fund 23.16
Escorts Balanced Fund 22.49
SBI Magnum Balanced Fund 22.26
DSPBR Balanced Fund 21.76
Canara Rob Balance Scheme 21.69
Shriram Equity & Debt Opp Fund 20.27
CRISIL Balanced Fund - Aggressive Index 18.99
S&P BSE Sensex - TRI 29.64
S&P BSE 200 30.81
Data as on November 24, 2017
*Returns are absolute
(Source: ACE MF, PersonalFN Research)

*Please note, this table only represents the best performing balanced mutual fund schemes based solely on past returns and is NOT a recommendation. This is for information purposes only.

As can be seen in the table, the CRISIL Balanced Fund - Aggressive Index generated a return of 19% over a 1-year period ending on November 24, 2017. Out of the 30 schemes on the list, 17 schemes delivered a return in excess of 20%.

Those who had invested in the best balanced funds of the past 1-year could be sitting on gains in excess of 30%.

Let's take a look at the 3-year performance. Which were the best funds in this period?

Best Balanced Funds Based On 3-year Performance
Scheme Name 3 Year* (%)
Principal Balanced Fund 15.22
L&T India Prudence Fund 13.81
ICICI Pru Balanced Fund 13.35
HDFC Balanced Fund 13.34
DSPBR Balanced Fund 12.91
Aditya Birla SL Balanced '95 Fund 12.75
SBI Magnum Balanced Fund 12.70
HDFC Prudence Fund 11.86
Franklin India Balanced Fund 11.33
Canara Rob Balance Scheme 11.19
Aditya Birla SL Balanced Advantage Fund 11.15
UTI Balanced Fund 11.07
Kotak Balance 10.55
ICICI Pru Balanced Advantage Fund 10.48
Baroda Pioneer Balance Fund 10.45
CRISIL Balanced Fund - Aggressive Index 8.09
S&P BSE Sensex - TRI 7.37
S&P BSE 200 9.77
Data as on November 24, 2017
*Returns are compounded annualised
(Source: ACE MF, PersonalFN Research)

*Please note, this table only represents the best performing balanced mutual fund schemes based solely on past returns and is NOT a recommendation. This is for information purposes only.

The compounded returns over the past 3 years have not disappointed either. In the 3-year period ending on November 24, 2017, the CRISIL Balanced Fund - Aggressive Index delivered a compounded return of 8%. Over the same period, nearly 20 balanced fund schemes successfully generated more than 10% returns.

The balanced fund schemes with the best performance leads the list with compounded returns ranging between 13%-15%.

Clearly, balanced funds made the best use of the recently market rally and rewarded investors handsomely.

How have balanced funds managed to score such massive returns?

This is because balanced funds most often are not be balanced in the true sense. Most schemes, currently classified as balanced funds, invest about 65%-70% of their assets in equity.

Some schemes have taken a quantum leap by investing in mid-cap stocks as well. With this aggressive equity allocation, balanced funds are able to score massive returns in a bull market. At times, some schemes even outperform many equity-diversified funds.

Unfortunately, investors consider only returns and pay little heed to the high-risk asset allocation.

Be wary of a change in asset allocation

This 'unbalanced' allocation had been troubling the regulator for several years. After several hints over the past couple of years to officially announce a formal product labelling, the mutual fund regulator finally released stringent guidelines for mutual fund categorisation last month.

Now, the nomenclature of schemes is set to change with the new regulation on categorisation of mutual fund schemes.

The mutual fund regulator has now defined balanced schemes as those that invest 40%-60% of their assets in equity, excluding arbitrage positions. Mutual Fund schemes that invest between 65%-80% of their assets in equity are termed as Aggressive Hybrid Funds.

In the coming months, either fund houses may change the asset allocation of existing balanced funds to conform to the capital market regulator's definition or they will classify the schemes as Aggressive Hybrid Funds and change the scheme names accordingly. A change in asset allocation will also result in equity-oriented schemes losing out on the tax benefit.

The lower equity allocation though reduces the volatility, compromises on long-term returns. In addition to this, these funds qualify as non-equity schemes for taxation purposes. Hence, with short-term capital gains, on units held for less than three years, will attract tax appropriated to your income tax bracket. Hence, if you fall in the highest tax bracket, the tax rate will be higher than 30%. This is obviously much more than the 15% tax rate equity schemes enjoy.

Long-term capital gains will be taxed at 20% with indexation for non-equity schemes. For equity schemes, the holding period is just one year and the long-term capital gains are tax-free.

Though the rules of the regulator are well intended for balanced funds to invest an equal proportion to equity and debt, such schemes may no longer be suitable for aggressive high-risk investors, and/or those with an investment horizon of greater than five years.

Most balanced schemes, based on the existing classification, invest over 65% of their assets in equity so that investors are applicable for a tax benefit. To comply with the regulations, most schemes may change their existing classification from Balanced Funds to Aggressive Hybrid Funds.

A fund house is permitted to offer either an Aggressive Hybrid fund or Balanced Fund. Hence, those with multiple schemes in the category will need to merge existing schemes. This will further have an impact on performance.

Should you invest in balanced funds?

Going by the capital market regulator's classification of balanced funds, the lower equity allocation, along with the tax implications on short-term and long-term capital gains, these set of funds do not seem very attractive.

If the fund house resorts to a change in asset allocation for existing schemes, it will have a direct impact on the performance of the scheme in the future. The long-term returns of the scheme will be subdued. The tax implications may lower returns further.

Hence, the best balanced fund of the past few years, may no longer continue to be the best performing balanced fund 2-3 years down the line.

If the fund house reclassifies the schemes as Aggressive Hybrid Funds with no change to the investment objective, these will be suitable for moderate to high-risk investors. As with all equity-oriented schemes, you need to maintain an investment horizon of five years or more.

However, you need to pick a scheme that has performed consistently through the years. Given the burgeoning assets, you also need to check if there is a noticeable change in asset allocation and the quality of stocks in portfolio. You do not want to end up with a scheme with illiquid investments.

Why depend on balanced funds to strategically allocate your investments?

PersonalFN brings to you a Strategic Mutual Fund Portfolio for 2025. The "Strategic Funds Portfolio for 2025" based on the core and satellite approach to investing. 'Core and satellite' investing is a time-tested strategic way to structure and/or restructure your investment portfolio.

Your 'core portfolio' will consist of large-cap, multi-cap, and value style funds, while the 'satellite portfolio' will include funds from the mid-and-small cap category and opportunities style funds. The core portfolio offers stability by investing in funds that promise sturdy returns and have a strong ability to manage downside risk. The satellite portfolio provides the opportunity to support the core by taking active fund calls determined by PersonalFN's extensive research on mutual funds.

And that's not all. You will also master the art of astutely structuring the portfolio by assigning weightages to each category of mutual funds and the schemes you select for the portfolio. PersonalFN's "The Strategic Funds Portfolio for 2025" is geared to potentially multiply your wealth in the years to come. Subscribe now!

This article first appeared on PersonalFN here.

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.


The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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