Since i started my journey in investment world, I have been hearing the importance of Asset Allocation. The recent drive of investor education by AMFI and various AMCs, also touches upon it as well as all the major finance magazines and news paper keep emphasizing on the asset allocation. First time i read about asset allocation and how to manage it, in one of the legendary book “The Intelligent Investor”. It preaches about a portfolio of 50% equity and 50% of debt, which can be 70% Equity & 30% Debt for a risk seeker, while for risk averse investors it can be 30% Equity & 70% debt. This should be re-balanced either on periodic basis or on basis of market scenario. If equity markets are undervalued increase allocation to equity and if they are overvalued decrease the allocation.
In theory this all make sense and a great advise of follow, though in reality it poses various challenges:
- Market understanding: Not all of us have a clear understanding of the market. It is difficult to judge whether the markets are overvalued or undervalued. To do so, you not only required market knowledge but also you need to track it more closely and regularly.
- Stock/ Bond Selections: We are usually conversant with the bank fixed deposits but the knowledge of Post office schemes is relatively less and it is very minimal when it is about the Corporate/ NBFC deposits or debentures. Similarly investing in stocks directly is not usually done by most of us as it needs time, rigor and knowledge to do so.
- Diversification: Even if we have a know-how of managing our portfolio, we need a large sum to have a robust diversified portfolio. If i am a small investor who saves few ‘000s each month, i can not but multiple stock in that.
- Costs: After we have a portfolio, the re-balancing means we need to continuously buy or sell the stocks and bonds to manage our required allocation or take positions based on market scenario. Each transactions costs us in form of brokerage as well as STT charges
- Taxation: When we sell our Stocks or bonds, we are liable to pay the tax on the gains. Short Term capital gain is 15% in terms of stocks and marginal tax rate of your in case of bonds, if we hold stock for less than a year and bonds for less than 36 months. Keeping track of each transactions and paying taxes can be too costly affair.
Balanced Advantage funds addresses all the above challenges and gives you a portfolio which changes its asset allocation based on market scenario. They also give you expert looking after your portfolio of stocks and bonds. Tax liability occurs only when you redeem the fund and is mostly treated as Equity investments. The investments can be started with as small as 500 INR per month. These funds have an ideal characteristics to be a fund in your core portfolio. Some of the recommended funds in this category are as below:
For Aggressive Investors: HDFC Balanced Advantage Fund, AUM: INR 36,000 Cr, 2.29% of expense ratio and returns over last 1, 3 & 5 years have been -1.14%, 8.57% & 16.51% respectively.
For Moderate Investors: ICICI Prudential Balanced Advantage Fund, AUM: INR 28,000 Cr, 2.15% of expense ratio and returns over last 1, 3 & 5 years have been 6.41%, 8.86% & 14.15% respectively.
For Defensive Investors: Aditya Birla SL Balanced Advantage Fund, AUM: INR 3,200 Cr, 2.33% of expense ratio and returns over last 1, 3 & 5 years have been 1.23%, 9.92% & 12.66% respectively.
NFO of the Kotak Balanced Advantage fund is open till July 27, 2018 can also be considered.
Disclaimer: Please speak to your adviser to check their suitability for yourself. Mutual funds are subjected to market risks, please read the scheme/offer documents before investing.
How would they be taxed? As debt funds or Equity funds? All the AMC will show is capital gains, leaving us with a problem on the tax aspect.
They still take precautions to make it taxed like equity only. As they take debt upto 35% and for further reduction of exposure to equity behave like arbitrage fund or use derivatives like futures and options to hedge the downfall.
Thanks of the informative article. What your thought on the Large AUM in Balanced Advantage funds? Should on go with Low AUM funds?
Would you want to invest money with Warren Buffet of the world or Kevin O’ Leary? Probably Warren Buffett, as he has accumulated more wealth for himself and his investors. Has been making money for Long and consistently..
Would you worry that too much money is invested with him? Hope this answers the question..
Thanks for the reply..
Thank for informative article.