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Balanced Funds Have Risen in Popularity

Balanced funds provide both equity advantage and debt cushion, along with automatic rebalancing, which have placed these funds in a sweet spot

Since the election results, the market has been witnessing new highs every day. The inflows into the market have been increasing and so are the investments in mutual funds. Hybrid equity-oriented funds or balanced funds have also benefitted from this rally. These funds have performed better than large-cap funds. SBI Magnum Balanced Fund's three-year annualised return is 26.37 per cent, whereas the highest return in the large-cap category is 23.71 per cent - that of Axis Equity Fund.

Hybrid equity-oriented funds or balanced funds have maintained a defined equity-debt ratio in their asset allocations. The funds' investments range from 65 per cent to almost 80 per cent in equity and the rest in debt. Balanced funds are not meant to outrace the equity fund category, but they have given better results in the last few years.

Investors invest in these funds because these funds fall less at the time of a bearish market. The debt allocation of the fund provides a cushion at the time of downside. The rebalancing of assets done by fund managers prevents balanced funds from falling in market turbulence. Rebalancing is an important strategy in rising markets. While rebalancing, the fund manager increases/decreases equity/debt allocations to maintain a fixed ratio.

HDFC Balanced Fund has given five-year annualised returns of 19.14 per cent. Its performance is better than that of ICICI Prudential Focused Bluechip Equity Fund, whose returns are 17.91 per cent. Also, ICICI Prudential Balanced Fund, Tata Balanced Fund and HDFC Prudence Fund have outperformed ICICI Prudential Focused Bluechip Equity Fund.

According to AMFI data, in January 2015, the AUM of balanced funds was ₹25,792 crore, which is the highest since 2004. Since January 2014, the total inflow has been ₹11,576 crore; and the total outflow, ₹4,976 crores. In the last five months, AMCs like ICICI Prudential, Birla Sun Life, IDFC and Kotak have also launched new funds under the hybrid equity-oriented category, which have gathered ₹1,773 crore in their kitties.