Outflows hit balanced funds for first time in 56 months

Once a hugely popular product, balanced funds are on a weak footing. Investors pulled out nearly Rs 1,000 crore from this category in January, the first monthly outflow in 56 months. This is a telling sign for these hybrid schemes that were sold to investors, especially retail customers, as a substitute to bank fixed deposits because these funds gave somewhat predictable dividends when the stock markets were in rip-roaring form.

Just a year ago i.e, in January 2018, balanced funds received net inflows of a whopping Rs 7,665 crore. Twelve months later, the monthly inflow picture has completely changed. Experts attribute this change in fortunes to the inconsistency of dividends and the imposition of tax on such dividends. Add to this, balanced funds' performance has been poor, with investors losing up to 16% in the last one year period.

A balanced fund invests in a portfolio with a mix of debt and equity instruments. It is ideal for investors with medium risk appetite.

"After attracting inflows for 55 consecutive months, balanced funds witnessed outflows of Rs 952 crore. Net outflows clubbed with MTM (mark-to-market) losses resulted in the category's assets eroding by 2.1%, or Rs 3,803 crore, to Rs 1.76 lakh crore," said Crisil.

Between April 2017 to January 2018, balanced funds had collected net inflows worth nearly Rs 78,000 crore. But with the popularity of the fund category waning, the net inflows dropped 85% to Rs 11,123 crore between April 2018 and January 2019. Investor folios in balanced schemes are currently at 64.09 lakh and there are 27 schemes counted as balanced by Association of Mutual Funds in India.

Radhika Gupta, CEO, Edelweiss Asset Management, told DNA Money, "Balanced fund flows have come down post the change in taxation of dividends, given some investors looked at this category as a monthly income asset class. We believe the category, particularly balanced advantage funds, continues to have a lot of promise, however, for investors with a three-year time horizon or more, and a need for moderate volatility."

Experts feel balanced funds may have been sold wrongly at times, which may be backfiring. "Balanced funds mainly sold very aggressively by banking channels. With a drop in FD rates, customers of these banks started to take money out. At that time, banking channels started to position balanced funds as a substitute for FDs with regular and predictable dividend income options. Now the chickens have come home to roost," said Vijai Mantri, chief investment strategist and founder-promoter, JRL Capital.

Post-demonetisation, many risk-averse investors were lured to make a switch from FDs to balanced funds. They were promised double-digit returns and tax-free monthly dividends. As markets fell, balanced funds, which have quite significant exposure to equities, fell. Also, the Union Budget 2018 introduced a 10% tax on long-term capital gains (LTCG) earned from the sale of shares held for more than one year. This 10% tax is also applicable on dividend earned from equity and equity-oriented mutual funds. Earlier, income from dividends was tax-free. Starting April 2018, investors started experiencing monthly dividends from equity mutual funds fall by 10%.

"With bond yields remaining elevated and equity markets also consolidating over the last few months, the performance of balanced funds has dipped recently," said a mutual fund analyst.