BackBalanced funds with tax edge lure India’s risk-averse to stocks
The funds received as much as Rs6,800 crore in the three months to June, an all-time high, reversing withdrawals from a year earlier
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Mumbai: Balanced funds are opening a new front in India’s investment landscape, as a tax break helps them attract record inflows and channel more money into equities and bonds.
The funds received as much as ₹ 6,800 crore in the three months to June, an all-time high, reversing withdrawals from a year earlier, data from the Association of Mutual Funds in India show. The inflows added to the record ₹ 32,300 crore injected into stock plans during the quarter.
Flows into balanced funds strengthened after the government said in February that bond fund holdings will have to be held for three years for them to be exempt from capital-gains tax. That made the hybrid funds, which are exempt from the levy after one year of holding, more attractive to those with a shorter investment horizon as well as first-time investors with a lower risk appetite.
“We expect the popularity of balanced funds to increase, providing a stable source of inflows into equities," S. Naren, chief investment officer at ICICI Prudential Asset Management Co., India’s second-biggest money manager with $25 billion, said in a phone interview from Mumbai. “We are also seeing some debt investors switching to balanced funds due to the change in the tax rule."
India’s benchmark S&P BSE Sensex index has risen 11% over the last year. Local sovereign notes returned 12.4% in the past year, Asia’s best performance, according to indexes compiled by Bloomberg.
Spreading out
The momentum behind the flows into balanced funds could strengthen as it’s “striking a chord" with first-time investors, according to Dhirendra Kumar, chief executive officer (CEO) of Value Research India Pvt., a New Delhi-based data provider.
“Mutual funds are trying to get new investors in smaller towns and cities, and such investors would be more comfortable putting in money through balanced funds," Kumar said by phone on Monday.
Fund houses are also launching balanced funds to meet demand from “conservative" investors, according to Dinesh Kumar Khara, CEO at SBI Funds Management Pvt., which has $13.3 billion in assets.
Economic reforms
Still, concern over the pace of economic reforms is a risk.
Prime Minister Narendra Modi’s Bharatiya Janata Party (BJP), voted into power in May 2014, doesn’t have a majority in the upper house of the parliament, where opposition parties are holding up bills including those to ease land purchases.
India “needs more reforms like the land acquisition bill and the goods-and-services tax," Sam Mahtani, a portfolio manager at LGM Investments, which has $4 billion in emerging market assets, said by phone on 17 July. “Any further delays in these is a concern."
The need for stability during periods of volatility will support demand for hybrid products, according to ICICI Prudential’s Naren. His Balanced Advantage Fund has beaten 96 percent of its peers in the past three years, data compiled by Bloomberg show.
“Investors wanting the best of both worlds are investing in balanced funds," he said. “In times of volatility, such funds are likely to give better returns." Bloomberg
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