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Why balanced funds make a lot of sense

india Updated: Mar 25, 2012 21:16 IST
Dhirendra Kumar
Dhirendra Kumar
Hindustan Times
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To all appearances, this looks like a time for fixed-income investing. The uncertainty and volatility that afflicts equity investing is likely to continue for a while. On the other hand, it's pretty clear that fixed-income returns are likely to stay at around 9% or higher. Bank deposits are fetching above that number; most open-ended debt fund categories are around that level; and investors can expect Fixed maturity mutual funds that are starting now to fetch around 10.5% or even more.

For a retail investor, the advisability of sticking with fixed income would be an easy conclusion to reach. Easy, and wrong. Taking a binary, fixed-or-equity view of the investments situation is a common mistake that investors make. It's a way of trying to time the market and market timing rarely works.

The classic way to solve this problem is asset rebalancing, done automatically through balanced funds. Asset rebalancing means that your portfolio is divided between fixed-income and equity in a certain fixed ratio. When the ratio moves away from this point because one asset class does better than the other, then you restore it. This is done by redeeming funds from the one that has done better, and investing them in the other one. When equity is growing faster than fixed income-which is what you would expect most of the time-you would periodically sell some equity investments and invest the money in fixed income so that the balance would be restored. When equity starts lagging, you periodically sell some of your fixed income and move it into equity. This implements beautifully the basic idea of booking profits and investing in the beaten down asset.

This is cumbersome (and potentially tax-heavy) to do directly but gets done automatically by balanced funds. I think balanced funds are the most valuable yet underappreciated idea in fund investing and its in times like these that investors would do well by realising their utility.

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