Pradeep Gaur/Mint
Pradeep Gaur/Mint

OMG- balanced funds

You'll be surprised to know how one balanced fund can be different from another.

The diversity of equity funds gets characterized by different categories that equity funds fall into—diversified, mid-cap, thematic and so on. However when it comes to balanced funds, most of us paint them with the same brush—all of them invest about 65% in equities and the rest in debt. But you’ll be surprised to know how one balanced fund can be different from another.

Different asset allocation

Even though a 65% equity allocation is the minimum threshold required retaining the “equity" character of a mutual fund scheme (to be eligible for tax benefits that come with being an equity fund), balanced funds can have a varying equity allocation. As per data provided by Value Research, the highest equity allocation by a balanced fund (or hybrid-equity fund as classified by Value Research) is 95.10% (UTI CCP Advantage Fund) and the lowest is 52.95% (ICICI Prudential Equity Volatility Advantage). Not just equities, the difference also comes in how balanced funds manage their debt components.

Different strategy

Some funds that go below 65% may be doing so if their fund strategy so demands. But a balanced fund that sticks to, say, 80% equity allocation assumes a different character than the one that invests only about, say, 55% in equities. Further while most of the balanced funds portray themselves as equity-oriented funds and are plain-vanilla funds, some balanced funds have specific goals such as children’s education or retirement.

These funds, typically, are part of a series; one is conservative (more debt, less equity) and the other scheme is aggressive (more equity, less debt). The aggressive scheme, therefore, gets labelled as a balanced fund. Now, if the same fund house has a plain-vanilla balanced fund, you will get to see two balanced funds in the product stable of that fund house. In reality, both the balanced funds (the plain-vanilla and target-based funds) are different.

One fund house, two balanced funds

Some fund houses have two plain-vanilla diversified balanced funds. In these cases, the fund would typically try and manage them differently to give each of them a different character. For instance, HDFC Prudence would usually have debt scrips of a longer duration. This makes the debt component a bit aggressive. HDFC Balanced would have scrips with a low duration. Such a situation usually happens when two fund houses merge. While some fund houses decide to run both schemes with different strategies, others prefer to merge.

Large-cap and mid-cap

Some balanced funds invest in a mix of large-cap and mid-cap stocks. Others prefer to stick to large-cap stocks significantly. For instance, DSP BlackRock Balanced Fund splits its equities component between large-cap and mid-cap stocks, almost equally. Others such as ICICI Prudential Balanced and Birla Sun Life 95 focus mostly on large-cap stocks.

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