Valuation-wary investors pour money into balanced funds

Lack of investment choices are driving many investors towards mutual funds, said financial planners.

Mumbai: Balanced funds, which typically invest 65% of their corpus in equities and the balance in debt, saw their highest monthly inflows in August since January.

The category received Rs 8,783 crore in August as elevated stock valuations prompted investors to opt for hybrid products with an exposure to debt. Since the start of the calendar year, the category has received inflows of Rs 46,943 crore.

“Equity valuations are elevated and are at a premium to long-term averages, which calls for some caution. Balanced funds, with a 65% exposure to equities are a good choice in such an environment,” says Harshvardhan Roongta, chief financial planner at Roongta Securities.

Over the last couple of years, the price to earnings (PE) ratio of the benchmark Nifty has moved from 20.95 to 25.89. With corporate earnings yet to see signs of a revival, many analysts believe valuations are on the higher side. Given this scenario, conservative investors believe it is better to ride the markets with balanced funds.

Lack of investment choices are driving many investors towards mutual funds, said financial planners. In an environment, where fixed deposit rates have fallen to 6.5%, returns from other asset classes such as gold and real estate are low, many investors are looking at alternative investment options. Also post demonetisation, many first-time investors are shifting from physical savings to financial savings. Financial planners are asking them to start with relatively low volatility products like balanced funds. “For many first-time investors, balanced funds which have an automatic balancing mechanism are a good starting point,” says Rupesh Bhansali, head (distribution) at GEPL Capital.

Bhansali points out that the balanced fund category has many funds, where equity component is dynamically managed. When valuations are high, exposure to equities is kept low. Bhansali said for risk averse investors, such asset allocation funds are an apt choices.

Financial planners believe the taxation advantage in balanced funds is also drawing investors there. Several HNIs prefer this category of funds, as these funds are treated as equity funds from a taxation perspective and the debt component automatically becomes tax-free. Funds with at least 65% of their assets in stocks can be treated as equity funds.

Many balanced funds have been bought by investors looking for monthly cash flows as many of these funds have started paying out monthly dividends in the recent past.

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