If equity looks too risky, a shift to balanced funds can be good option


By DK Aggarwal

The domestic market has so far been the best performer among its emerging market peers, and this has attracted investors to equity mutual funds. Equity mutual funds have received a strong inflow, mainly driven by strong corporate earnings expectations and near-normal monsoon outcome amid various concerns such as the impact of trade war, a weak rupee and the forthcoming elections.

On the flip side, the rupee is continuously depreciating against the dollar and crude oil prices are moving higher on the back of global trade tensions, strengthening dollar and an overall weakness in emerging market currencies.

Given the current account imbalance and a higher import bill, this may not augur well to India’s macroeconomic going forward. It is evident from the recent spike in bond yields due to a rise in current account deficit. To note, the 10-year government security yield recently touched 8 per cent, the highestin four years.

With the stock market rising consistently despite higher valuations, as they are right now, would it be risky to invest in equity funds fully? Does it mean one should stay away from equities and risk earning returns that are lower than inflation?

Of course, this seems to be a good time for investors to rebalance portfolios to debt. So, investing in balanced funds, which invest at least 65 per cent of the corpus in equity and the rest in debt, would be a wise decision as it would ensure capital appreciation in both falling and rising markets. These funds, also known as hybrid funds, can be a good choice for those who are new to the stock market and who have low risk appetite.

Actually, the stock market offers better returns in the long run but remains volatile in the short term. The debt part of the balanced fund is meant to cushion this volatility in equities.

Nowadays balanced funds have got a lot of attention from investors and this is evident from the data that shows this category of funds recorded a net inflow of Rs 2,630 crore in August against just Rs 287 crore in July. Also, the AUM of the mutual fund industry crossed the Rs 25 lakh crore mark for the first time in August rising from Rs 23.05 lakh crore in July.

To conclude, investors interested in maintaining exposure to both equity and fixed income securities may consider investing in balanced funds. One should follow an asset allocation model, with a clear idea of equity and debt allocation. Investing is not just about returns, but also managing liquidity.

So, it is advised to invest in balanced funds through SIPs, which would allow one to invest a fixed amount either monthly or quarterly over a period, thereby averaging out the cost of investing and delivering the benefit of compounding.

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