Should I invest a lump sum in HDFC Balanced Fund?
- Manoj Dave
Balanced funds are predominantly equity funds. To ensure that you do not have to pay long-term capital gains tax, fund companies ensure that at least 65 per cent of the underlying assets of the fund always stay invested in equity, which is the threshold acceptable to the tax department for this purpose. And this 65 is just the minimum--in practice, many funds tend to be 70 to 80 per cent in equity.
From this, it is clear that in terms of the short-term volatility they will face, balanced funds should be treated like equity funds. They can rise sharply during market rallies, and they can drop sharply when the markets fall. These rises and falls are less extreme than pure equity funds, but they are still quite severe. For example, over the 60 months from 2009 to 2013, HDFC Balanced Fund fell by at least 15.72 per cent in 12 months, and rose by 40.32 per cent in 14 months.
Therefore, these funds are not suited for lump sum investments. With a lump sum investment, there is a danger that you could invest at a market peak, and then face sudden losses. Obviously, the reverse could also happen. You could invest in a market bottom, and quickly gain a lot of money, but there is no way of knowing.
Therefore, the cautious approach is that investments must be made through SIP. Even if you have a lump sum available, you should split it into at least six monthly installments. This will average out your purchase NAV.
This article was originally published on December 04, 2014.
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