You must have heard this statement, Higher the risk, Higher the chances of profit. And, yes it is true to some extent. According to the tradeoff, the investor can generate higher profit, only when he/she accepts a higher possibility of losses. But, when investing in mutual funds and specifically in Balanced Funds, this tradeoff doesn’t work all the time. And, there exist an opportunity where you can pocket higher returns at lower volatility.
Reasons for Higher Returns
There is no such specific reason for such opportunities. Since the launch, it has been marketed as the most ideal investment instrument for conservative investors, because of the lower volatility.
Balanced funds, surely has an advantage over the large-cap funds, as it eliminates the volatility from almost 40 per cent of its fund asset, plus generating a risk-free return. Further, it has the liberty to increase the equity percentage (to a certain extent), when the market is doing well, that helps in generating extra returns.
Another possible reason for higher return is, Balanced Funds generally have a distinct mid to multi-cap tilt for their equity portion, and changes according to the market condition. This helps to tap undervalued stocks without limiting its scope like with large-cap funds.
Balanced Funds those have Outperformed Popular Large Cap Funds
|1yr Return %||3yr Return %||5yr Return %|
|ICICI PruEquity & Debt Fund||8.22||14.98||14.43
|HDFC Hybrid Equity Fund||6.6||13.98||14.43
|Canara Robeco Equity Hybrid Fund||9.04||14.39||14.03
|SBI Equity Hybrid Fund||9.28||13.52||14.88
|Mirae Asset Hybrid Equity Fund||12.21||16.23||-|
Large Cap Equity Fund
|1yr Return%||3yr Return%||5yr Return%|
|ABSL Frontline Equity Fund||6.15||13.34||12.83
|ICICI Prudential Bluechip Fund||8.45||16||13.33
|SBI Bluechip Fund||6.17||12.62||14.91
(Return as on 21st May 2019)
(I have taken returns of the Direct Plan of all funds)
Funds not only generated higher returns but also surpassed the return percentage of some popular large-cap equity funds in the long term.
Looking at the data of the last ten years in CRISIL AMFI mutual fund performance index, the difference can be clearly noticed. The returns percentage of Balanced Funds are somewhat close or higher by a slight margin compared to large-cap funds.
All the data presented above doesn’t take away the fact that large-cap funds have the potential for far greater returns depending on the market condition. Investors must also understand that market dynamics always don’t favour balanced funds. A small change in interest rate can directly affect the returns percentage of the fund.
But, if you are looking for creating wealth over the long term through mutual funds and looking for a relatively less volatile instrument, then Balanced Fund is the right instrument for you.