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Elders always advice us to take balance approach in our life. They
tell us to keep professional and personal life separate, take some time for
family and give society something back, which can also help others. Balancing
is an art and one has to learn the same so that you are never lost in any
given situation. Balancing in investment is also important to get the desired
result.
One of the best ways of balancing in investment is proper asset
allocation. If you invest exactly according to your asset allocation
depending on time horizon and also rebalance your portfolio periodically,
mostly it will give you better result.
But, if you do not understand these jargons of investment and do not
have access to professional help, then there is one more time tested instrument
available for investment in equity. I just want to highlight the balancing in
equity which most us know but very few implement in real life.
The best answer to this volatility and to earn high return in the
longer run is investing in Balanced Funds of mutual fund. Balanced mutual
fund schemes invest around 65-85% in shares of listed companies and the
balance 15-35% in debt instruments. They provide an ideal mix of growth (equity) and safety (debt
instruments). Your success as an investor depends upon your ability to choose
the right investment options. This, in turn, depends on your requirements,
needs and goals.
According to me there are three major advantages if you invest in a
balanced fund with a long term view and take calculated risk.
1) Investing in Equity:
It is proven fact that in a developing country like India, equity will
give good inflation adjusted return if you invest systematically and stick to
your investment. As balanced fund largely invest in equity, investors get the
advantage of participating in economic growth of the country. It is necessary
to understand equity as an asset class before investing.
You cannot expect overnight profit from equity, as it is always a
long-term game. If you understand and follow the basic rules of investing in
equity then this volatility in stock market is unlikely to disturb you.Firstly your time horizon for investing in equity should be minimum 5
years and above. Never try to time the market and always invest
systematically is the success mantra for investing in equity.
Risk comes from not knowing what you are doing. If you take calculated
risk it will benefit you in the longer run. Economy also runs in a cycle;
like good phase, bad phase is also not permanent.
2) Auto Rebalancing:
It is not only important to invest according to asset allocation but
it is equally important to review and rebalance the portfolio periodically.
Rebalancing is the process of restoring your portfolio back to its original
asset allocation.
The rebalancing happens automatically in balanced fund and the same
gives you added advantage when the markets are too volatile. As per objective
of the scheme which is pre decided fund manager of the balanced fund can’t
invest more or less in equity in any given point of time.
When the markets are high the fund manager has to compulsory sell
equity to maintain the maximum level and likewise when the markets are low
fund manager has to increase the investment in equity to maintain the minimum
level of equity investment. The process is continuous which a normal investor
can't do because of lack of knowledge and expertise.
This is a proven fact that when markets are falling investors sell in
panic and when the markets are rising investors become excited to
invest further in equity which is not a good idea for equity investment. The
returns in equity are generated when the markets are low when you accumulate
more units in your folio.
The balanced fund exactly does the same thing and therefore gives
better result in the longer run compared to traditional instruments.
3) Tax free debt:
In investment, you should look at post-tax returns and not gross
return, which is offered to you. The investment in fixed deposit and postal
schemes are subject to normal rate of tax as per your individual tax slab, which
reduces your overall return.
The investment in debt funds of mutual fund gives you the advantage of
indexation after one year but still you have to pay some tax on gain. EPF and
PPF have the upper limit where you can not invest more than prescribed limit.
The balanced fund is the only instrument where the entire debt is tax
free after holding the fund for more than one year as long term capital gain
in equity is tax free. The balanced fund come under equity category as it
invests more than 65% in equity.
Even for any reason if you withdraw from balanced fund within one year
the tax rate is fix at 15% and not as per individual slab. This is a
huge advantage for those who fall in higher slab rate.
Investing in balanced funds of mutual fund is one of the best
solutions for investing in equity for the long-term. Further if you invest in
balanced fund systematically via monthly SIP than is likely to give you
better result.
You should be careful while selecting the right balanced fund, as
there are around 20-plus balanced funds available in the market. Choose a
fund which is at least 3-years old and has good asset under management
(AUM). You should also check the ratings given to the fund by good
rating agencies.
You should also monitor and review the performance of fund chosen by
you and see that it consistently beat the benchmark and is not far behind
against its peers. It is always advisable to take the help of professional so that you
can invest in good performing balanced fund and who also help you in monitoring
and review process.
This article first appeared at moneycontrol.com on 18th October'2013. Below is the link.
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Friday, 18 October 2013
Balanced funds are ideal for equity exposure
