Which are the Top 5 Best Balanced Funds 2018 to invest in India? Balanced funds nowadays are being sold like hotcake in India. Mainly because of tax advantage, automatic asset allocation and the best returns they generated. However, how to choose the best among the existing funds?
What is the Balanced Fund?
There are mainly two categories of Balanced Funds in India. One is Equity Oriented Balanced Funds and another is Debt Oriented Balanced Funds.
Equity-Oriented Balanced Funds, primarily have minimum 65% equity exposure so that they can be classified as equity funds for the tax purpose. The remaining 35% to 25% will be in debt securities like gilts, corporate bonds, money-market instruments etc.
Debt-Oriented Balanced Funds, primarily have less than 65% equity exposure to equity and rest will be in debt securities like Gilts, Corporate Bonds, Money Market Instruments etc.
Equity Oriented Balanced Funds are considered as equity funds for taxation purpose (even though there is around 35% to 25% debt exposure). However, Debt-Oriented Balanced Funds are considered as Debt Funds for taxation purpose and taxed accordingly.
However, in this post, I am concentrating only on Equity-Oriented Balanced Funds.
Balanced Fund Taxation
As I said above, there are two types of Balanced Funds. One is Equity-Oriented Balanced Funds and another is Debt-Oriented Balanced Funds.
Equity Oriented Balanced Funds are treated like pure equity funds. However, Debt Oriented Balanced Funds are treated as debt funds for taxation purpose.
The current tax structure of Mutual Funds is explained in below image. First let us understand what is LTCG and STCG from below image.
Now let us understand the current tax rate applicable for Mutual Funds.
Below is the current DDT rate applicable for all Mutual Funds after the Budget 2018.
For complete details, refer my post “Budget 2018 – Mutual Fund Taxation FY 2018-19“.
Top 5 Best Balanced Funds 2018 to invest in India
Now let us select the Top 5 Best Balanced Funds 2018 to invest in India. Below is the list of my Top 5 Best Balanced Funds 2018 to invest in India.
You noticed that all funds follow the Crisil Balanced Fund Benchmark. However, what this Crisil Balanced Fund Benchmark constitutes is unavailable to the public. Because this costs Rs.11 lakh a year. Hence, such information is not available to us to do further research on the benchmark.
Portfolio of Top 5 Best Balanced Funds 2018 to invest in India
In above image, I shared you the return part of last 10 years. Now let us dig deep and find out some signals in relation to the CURRENT portfolio of these Top 5 Best Balanced Fund 2018 to invest in India.
This how the current portfolio looks for equity and debt.
You noticed that HDFC Balanced Fund holding higher small-cap portfolio than the other funds. Also, when it comes to debt portfolio, Tata Balanced Funds average maturity is highest and then comes the HDFC Balanced Fund. The credit quality of the underlying bond papers is HIGH for Tata Balanced Funds. Rest of all the funds credit quality is AA.
Notice the average maturity of the debt portfolio, it is in between around 7 years to 4 years. Do remember that higher the maturity higher the volatility risk for debt portfolio.
Advantages of Balanced Funds
As these funds invest both in equity and debt category, you will find the diversification in a single fund. Due to such diversification, these funds have lower standard deviation than the pure equity funds. Lower standard deviation means lower risk.
# Re-Balance and Asset Allocation-
The fund manager rebalances the portfolio based on market conditions and asset allocation limits periodically and maintains the asset allocation without any tax implications or exit load.
This will reduce the volatility and also preserve the gains. Hence, you are freed from manual re-balancing.
For the taxation purpose, equity-oriented balanced funds are treated as equity funds. Hence, even though such funds have a certain portion of debt portfolio, the debt portfolio also be tax-free.
This seems to be the biggest advantage to many. In case you separate your asset allocation between debt and equity by investing separately in debt funds or equity funds, then for debt part, whether in short term or long term, you have to pay the tax (based on tax rules shared above). However, with equity-oriented balanced funds, such debt part is completely tax-free.
Disadvantages of Balanced Funds
# Considering for short-term goals
Due to above-said advantages, many investors, in fact, many advisers recommending equity-oriented balanced funds for short-term goals which may be even less than 5 years.
They completely neglecting the equity exposure of such funds.
# Unable to understand the portfolio
Many of us feel that minimum 65% of the portfolio is in equity and rest is in debt. Hence, debt part is totally SAFE. But they fail to understand what types of debt portfolio the is investing.
Even in case of the equity portfolio, you must analyze the stocks the fundholding. If the fund has higher exposure towards mid and small cap stocks, then it is riskier than holding a pure large cap fund.
- Never consider equity-oriented balanced funds if your goal is less than 5 years or so.
- Even if more than 5 years also, consider such funds as pure equity funds and try to allocate some portion of your investable amount to debt funds also.
- Never try to chase the returns. Equity Oriented Balanced Funds are also risky like other diversified equity funds.
- Never be in wrong belief that Debt Portfolio of the Equity Oriented Balanced Funds are completely SAFE. Based on the modified duration (sadly I am unable to find for these balanced funds), average maturity and credit rating of underlying bonds, the bond portfolio shows you the volatility.
- Finally, never invest in such funds just with the intention that debt part of these funds is tax-free.
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