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Monday, August 18, 2014

Balanced Fund versus combination of Equity fund and Fixed Deposit

 

Balanced fund versus combination of equity fund and fixed deposit

 

 

Comparison of returns of balanced fund versus combination of equity fund and fixed deposit

Will you be better off constructing your own balanced portfolio or investing in balanced funds? Let us analyze with the help on an example. Let us assume your asset allocation target is 70% equity and 30% debt. We will examine two investment options:-

  1. You constructed your own balanced portfolio, by selecting top performing diversified equity fund and investing 70% of your investible corpus in the fund. You invested the balance 30% in a fixed deposit. For the equity portion we have chosen ICICI Prudential Dynamic Plan, a diversified equity fund. ICICI Prudential Dynamic Plan has given nearly 19% annualized returns over the last 5 years. Your investment period was the last 5 years.

 

  1. You invested your investible corpus in a top performing balanced fund. We have chosen a top performing balanced fund from the ICICI Prudential stable. Our balanced fund selection is ICICI Prudential Balanced fund. Like ICICI Prudential Dynamic Plan, the ICICI Prudential Balanced Fund has also given excellent returns over the last 5 years. Since ICICI Prudential Balanced fund has equity exposure target of around 70%, your asset allocation target would have been met. As in option 1, your investment period was the last 5 years.

Let us now see how the returns compare after 5 years. The table below shows the return on the portfolio of the equity fund and fixed deposit.

Let us now compare the above with the return on the balanced fund investment.

We can see that the return on the balanced fund is Rs 1.08 lacs higher than the portfolio of the equity fund and fixed deposit. What if you had invested in a good long term income fund instead of fixed deposit in option 1? Sure, the return would be higher if you had invested in an income fund, since it is more tax efficient than a fixed deposit. However, the return on the balanced fund would still be higher

Conclusion

Balanced funds are excellent investment long term investment options. They can help you meet your asset allocation targets, help you with automatic rebalancing of your portfolio and are more tax efficient. If you have a more aggressive asset allocation target, combine your balanced fund investment with a large cap equity fund or a mid cap fund. If you have a conservative asset allocation target you can consider monthly income plans, which are another variant of balanced funds, for conservative investors However, as with all mutual fund investments, it is imperative that you select a top performing balanced fund. Difference in the performance of a fund in top quartile and bottom quartile is significant. You should consult with your financial adviser, if balanced funds are suitable for your investment portfolio.

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