While I have always felt that this is really not even a debate, there are many readers who really think that it is possible to get better returns from a Balanced funds as compared to a diversified equity fund. Well, that will be a great thing if it were true. After all, the holy grail of all investors is to have a product which reduces risks and gives you similar or better returns than the riskier counterparts !!
Instead of getting into the past histories and data, let me try tackling this issue with a simple example. Assume the following scenario:-
- You are investing in a balanced fund X and a pure equity fund Y simultaneously.
- Fund house and manager are the same and you do it for a period of 10 years.
- For Balanced fund 65 % is in equity, the rest is in debt.
- As the FM is the same, the portfolio invested in is also the same. So if your investment is 10000 Rs a month, 6500 Rs will go to equity.
- Let us assume a return of 12 % in equity and 9 % in debt over the 10 year period. These are logically conservative but will serve to illustrate the point.
- Corpus reached for pure equity fund Y in 10 years will be 23.23 lacs.
- Blended rate of return for fund X is 65 % of 12 % + 35 % of 9 % or 10.95 %.
- Corpus reached for Balanced fund X in 10 years will be 21.83 lacs.
Note that I have assumed a high rate for debt and a relatively low rate for equity returns. If you increase this difference the performance gap will be more obvious. So, if this is the case why is it that some Balanced funds have better returns? The answers can be again arrived at if you think a little objectively:-
- The FM of a Balanced fund may take lower risks with the portfolio. This has more to do with the nature and mandate of these funds.
- The above will help in a market not doing well but equally it will under perform quite a bit in a bull market.
- In a bear market the riskier stocks can get battered quite badly. As such the recovery for these will also take much longer. Again the risk is on 100 % of the portfolio as opposed to the Balanced fund where the risk is on 65 % only.
However, this does not say anything favourable for the Balanced funds. You might as well invest whatever you want to in Debt instruments and the rest in Equity. That is a more logical way of doing it without getting into the hybrid instruments. You should only look at Balanced funds in the situations I have stated in the last post.
Imagine this too – with declining rates and improving equity markets it is quite possible to have equity returns at 15 % and debt returns at 8 %. In this scenario you will get a blended rate of 12.55 % which is about 2.5 % less than the pure equity fund rate.
Of course, at the end of the day it is your money and your plan.