PowerMF Blog – Empower Yourself

A Background

The Indian Mutual Fund Industry has introduced various products and packages over the last couple of decades. One of the products which was supposed to provide asset allocation option for the investor was the Balanced Fund. In fact, the first open ended scheme in the Indian Mutual Fund market was a Balanced Fund in the form of US64. Keeping in line with the experience of the US64 scheme, the whole category of Balanced Funds seems to have had a roller-coaster ride.

Balanced Funds – A review

To put it in perspective, the table below provides the comparative AUMs between Dec 1999 and Dec 2010 across various asset classes.

From the above, it can be seen that it is only the ‘Balanced Fund’ Category which has had a negative AUM growth over the last 12 years.

Tracking its AUM over the period ranging from 1999 to 2010 gives interesting insights. The Table and the graph below gives a tell tale story about this category of scheme in the Mutual Fund Industry.

Hence, the Balanced schemes have hit the nadir in 2003 and have grown subsequently to reach around Rs. 19800 cr. in Dec-2010, which is still below the Dec 1999 numbers.

More than looking at why these numbers of come down or gone up and the impact of the US64 saga on the balanced scheme, it may be interesting to look at the same from the customer orientation and investment opportunity standpoint.

Why Balanced Funds?

The Balanced Funds invest across multiple Asset Classes. Typically, most balanced funds focus on investing between both equity and debt instruments. The decision on % Allocation across the asset classes is taken by the fund managers depending on the market conditions, of course, keeping in line with the terms of the scheme.

Thus, an investor investing in the balanced funds, gets exposure to 2 or more asset classes. It is a fact that there is a need for Asset Allocation across multiple asset classes for any investor. Hence, a balanced fund creates an opportunity for one to allocate through a single investment instruments

Why have they not appealed to investors?

Only the retail investors invest in balanced funds. There is hardly any institutional / corporate investment activity in the balanced fund. This is clearly visible from the fact that only around 3% of the overall assets are parked in the balanced funds.

While theoretically, investors need to spread across multiple asset classes, we have seen very clearly in the past that investor flock certain asset classes sometime and the other in the other time. When the equity markets are booming, we see people investing heavily in equities and when they are not doing well they shun equity. This mentality of momentum based asset allocation has continued for long time now in the markets which has sidelined an asset allocation product like Balanced Funds.

There are also issues of taxation and distribution commission which have affected the balanced fund category.

Is there a future?

Ideally, a balanced fund should be a good product to invest in.  However, history shows that neither  has it caught investors fancy nor has it attracted the attention of the fund houses in their marketing approach. Further, with the new regime of advisors representing the investor, it will be in the interest of the advisor to handle the allocation across asset classes for the investor by choosing specific and performing products in each of the asset class rather than go for a coupled product like balanced funds. While it may not be curtains for the balanced fund industry, only innovative product design backed with effective marketing which will see the growth of this category in the mutual fund space.

Fundu Vishy

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