Many conservative investors over the past many months had warmed up to balanced funds, a hybrid of equity and debt funds. Heavy marketing of ‘regular' dividends that beat the interest received from bank Fixed Deposits was a big ‘pull'. Plus, the existence of debt assets in balanced funds meant that when equities fell, their money would be cushioned against any hard landing.
But recent market volatility and tax on dividends of funds appear to hit sentiment. DNA Money talked to experts to understand the way ahead for balanced fund category, which oversees Rs 1.8 lakh crore worth assets.
Falling inflows
Net inflows for balanced funds in April 2018 was only Rs 3,500 crore compared to Rs 6,754 crore just a month ago, that is, March. The April net inflow number is the lowest since January 2017 when net inflows had dropped to Rs 3,300 crore levels.
Vidya Bala, head of mutual fund research, FundsIndia said: “Wherever balanced funds were sold as regular income-generating products, the market volatility since February besides the Dividend Distribution Tax (DDT) on equity funds have both dented the confidence of investors who bought these funds for the purpose of dividend. This explains the reason for higher outflows (thus reducing net flows) as well as the decline in the pace of inflows."
Fund managers, however, are not ready to buy the waning interest argument, although they blame market volatility. Sanjay Parekh, senior fund manager, Reliance Mutual Fund feels the fall in the net sales (inflow) for the balanced category is temporary, after many months of strong inflows. "Since a lot of investors participating in this space are conservative by nature, the recent market volatility wherein key indices corrected approximately 10% between February to March ‘18, would have impacted the investor sentiment leading to lower flows."
Gross inflows in April 2018 seemed to have dropped to Rs 6,500 crore compared to Rs 8,000 -1,2000 crore in previous months. "The initial trends for the month of May 2018 makes us believe the gross inflows should revert back to the average range witnessed in previous months," added Parekh.
Taxing times
In the recent past, a trend has been observed wherein conservative investors have been moving their surplus money into balanced funds. This is because they believed that these funds were giving them regular dividends that beat the regular interest received from bank FDs by a big margin.
Renu Pothen, research head, fundsupermart.com said: "We believe that the government’s decision to impose a 10% distribution tax on dividends declared by equity-oriented mutual funds was in the right direction. And although this move has dampened the sentiments as far as this category is concerned, we feel it is too soon to point to the tax as the sole reason for the low April net inflows into balanced funds."
"The DDT will definitely reflect on the future dividend percentage and if the market is volatile in coming months, there may be a dividend freeze and this, in turn, will affect the monthly income," pointed out Vijayasri S Kaimal, investment analyst, Geojit Financial Services.
Fund managers seem to think that current tax rates don't affect investors. "Given that the current long-term taxation rate for growth option and DDT rate are similar, it is unlikely that there is any significant loss of interest in the dividend option, post the introduction of distribution tax," said Parekh. In case of Reliance MF's balanced fund they witnessed only around 1/3rd of the incremental inflows in dividend option, he added.
It is better not to depend on balanced funds for dividends and view them as a good asset allocation product. "If one reaps capital gains from a debt fund in the short term, they have to pay 15% short-term capital gain tax (within three years), but the DDT on equity is only 10%. Balanced funds are suitable for a moderate investor as the portfolio’s debt part will reduce the risk of the equity portfolio," advised Vijayasri. Equity oriented balanced funds are treated as equity funds as far as tax treatment is concerned, if they maintain at least 65 percent of investments in equity on average.
After Sebi categorisation of schemes, hybrid schemes can fall into six categories. Post-Sebi categorization, in case of balanced category there is minimum confusion as most of the existing funds are placed in the aggressive hybrid category and hence it is easy to identify and track, said Reliance MF's Parekh.
Inflows into balanced funds should also be viewed in line with the pattern noticed in equity funds, as balanced funds are also equity products, says Bala. "Inflows in both equity funds and balanced funds have significantly reduced compared with six months ago," she noted.
BALANCE FUNDS SCORE CARD
- Net inflows 48% lower in April as compared to March
- Dividend tax of 10% one reason for investors losing interest
- Suitable for moderate investors as debt portion will reduce risk of equity portion
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