Mr Naresh Gupta, a non-pensioner super senior citizen living in Delhi, recently took out fixed deposits (FDs) to manage his household expenses. However, he needed a regular income and sought our advice on whether to invest in a balanced-advantage fund (as suggested by his friend) for this purpose.
What are balanced-advantage funds?
- Balanced-advantage funds, also dynamic asset allocation funds, are a type of hybrid funds that invest in both equity and debt instruments.
- Unlike equity and debt funds that have fixed investment mandates, balanced-advantage funds have a dynamic equity-debt allocation. Broadly speaking, these funds put more money in equities and less in debt when markets are depressed, and vice versa.
- Fund houses claim this dynamic allocation helps them capture potential upsides and limit downsides in volatile equity markets, making them popular among investors.
- However, balanced-advantage funds widely vary in their risk-reward profile. Some funds are vastly conservative, while others can be high on the risk metre.
What does this mean for Mr Gupta?
- Given these funds' wildly differing risk profiles, Mr Gupta must exercise caution while choosing the right balanced-advantage fund.
- For a regular-income portfolio, Mr Gupta can go for a balanced-advantage fund where the equity allocation stays in the range of 40-50 per cent, and doesn't move to extremes.
- For instance, if a balanced-advantage fund goes aggressive on equity and the market tanks, it can pose a hurdle in deriving regular income. At the same time, a balanced-advantage fund which takes a very conservative call on equities (around 15-20 per cent) may not earn enough returns to support regular income
That being said, Value Research is sceptical of mutual funds that rely on timing the market. We believe that static equity-debt allocations (such as 75:25, 50:50 and 25:75) based on your ability to take risks work better in the long run. It eliminates the chances of pre-empting market moves based on models or human judgement. Even in the case of funds with dynamic asset allocation, we would prefer the ones that do not take extreme calls. It brings higher predictability.
An alternate route
Mr Gupta can also follow the below alternate strategy:
- Invest at least one-third of the money in equities at all times, preferably in good flexi-cap funds or large-cap funds (for very conservative investors) to achieve returns that beat inflation.
- Invest the other two-thirds of the money in fixed-income investment avenues, such as government-backed guaranteed return schemes like the Senior Citizen Savings Scheme (SCSS). Also, allocate some of the funds to high-quality short-duration funds for emergencies.
- Rebalance the portfolio every year and limit annual withdrawal to no more than 5-6 per cent of the corpus.
For detailed information on how to set up a portfolio for regular income, click here.
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