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Are you missing on this dream investment option?

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Pawan Agrawal

Every investor dreams of selling his equity investments when the markets are high and buying more when the markets are low. Every investment expert and theorist tells you the same. But let us see what happens in reality.

Think about 2008-09 period. How many people were willing to invest when Sensex was around 10,000 levels? Negligible. Now think about May 2014 onwards when Sensex is at all time high. Are you reading news and reports of investors coming back to equity investing? Probably, yes.

In real life, people tend to invest more when markets are high and sell when the markets are low. In this process, though the mutual funds may be generating good returns over long term, the investors are hardly able to generate satisfactory returns from these same investments.

So, is there an investment option which can help the investor to buy more when the markets are low and sell when the markets are high? The answer is a big YES. There is.

Equity based Balanced funds are such investment options which can make any investor’s dream(and theory) come true. These funds invest 65-75% of the money in equities and 25-35% money in debt securities. When the market rises, the value of the equity portion of balanced fund rises, making the equity portion value more than the defined percentage. To maintain the earlier balance, they sell some equity portion and invest this gain in debt securities. In this manner, even if the market falls from this situation, they tend to lose less than pure equity funds.

In the situation of market going down, the value of equity portion becomes less than the defined percentage of 65-75% and hence at this point they sell debt securities and buy equities at a lower cost. As and when the market rises from here, they tend to gain more on these low cost purchases.

By constantly balancing the equity:debt portion, they are able to generate attractive returns with low/medium risk in comparison to pure equity funds. Historically, the average balanced fund category returns in last 10 years is 16% against the average equity fund category returns of 18%. Quite attractive if you consider that balanced funds manage money with only half the risk of pure equity funds.

So, are Balanced Funds for you? Definitely YES if -

1. You are looking for attractive returns with lower downside risk.
2. You are a first time investor in mutual funds looking for growth investments
3. You fall In high tax bracket and plan to rebalance your equity:debt portfolio often.
4. You are approaching retirement and wish to convert your pure equity investments to moderate risk investments with further growth potential.
5. You believe in theory of Buy Low-Sell High but do not have the time to do so.

Believe in the power of Buy Low-Sell High for long term wealth creation. Think of adding balanced funds to your portfolio as a core holding.

Happy investing!

Pawan Agrawal is the founder and managing partner of Investguru. You may reach him at pawan@investguru.in .

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Suresh says

6/6/2015 11:27:00 AM

good article Pawan. Like you said, hybrid / Balanced funds would help those investors who want to invest in stock markets indirectly but want to reduce the risk. It is good opportunity for them... Suresh.....



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