June 09, 2017

Flows in balanced MF schemes increase multi-fold in Jan-May

An article I wrote for the news organisation I work for currently.

Flows in balanced MF schemes increase multi-fold in Jan-May
    Flows into balanced schemes of mutual funds have shown extra-ordinary growth in the last three years, with the first five months of the current calendar year witnessing more net inflow than in the whole of last year.
    As the stock market continues to run up there is a growing number of investors who perceive balanced funds to be less riskier than equity funds and at the same time giving higher returns compared to income funds, said Vivek Mahajan, head of research at Aditya Birla Money.
    Mutual fund investors are turning slightly wary of the high valuations in the stock market and are getting cautious by turning to balanced funds.
    Balanced funds are hybrid in nature investing in both, equities and debt securities, with an orientation towards either. An equity-oriented balanced fund, would have 50-65% exposure to equities and balance in debt, and vice-versa for debt-oriented balanced funds.
    The balanced funds recorded net inflows of 286 bln rupees in Jan-May this year, exceeding the net inflow of 247 bln rupees in entire calendar 2016. This is the highest in over seven years, data of flows from Association of Mutual Funds in India showed (see table).
    In May, assets under management in balanced funds crossed the one-trln-rupee mark ending the month at 1.02 trln rupees, more than double from the year ago level.
    Equity funds have recorded net inflows worth 335 bln rupees in Jan-May while income funds have seen net inflows of just 230 bln rupees.
    Last year, balanced funds saw net inflows grow 16% on year, compared to 7.7 times on-year growth in income funds' net inflow and a 46% on-year fall in net inflows in equity funds.
    But it was in 2015 when flows in balanced funds increased dramatically. In that year, the net inflow in balanced funds jumped 3.7 times on year to 214 bln rupees, even as equity funds' net inflow increased just 74% on year and that in debt funds declined by 37%.
    According to analysts, the relationship managers in financial services firms and equity brokerage firms which sell financial products to retail investors find it easy to market balanced funds to existing and new investors as a safe product.
    Since November last year, when demonetisation made investments in real estate un-attractive, and with gold prices continuing to be subdued, the entire surplus investible surplus of most investors have been ploughing into equities and debt instruments.
    In their aggressive marketing of systematic investment plans, mutual funds are giving balanced funds the same importance as they typically give to equity funds.
    For instance, in the market commentary of its latest monthly factsheet for the current month, ICICI Prudential Mutual Fund said since the uncertainty of global events cannot be ruled out the equity market could be volatile in the near term and that new or first time investors looking for equity exposure could consider SIP in ICICI Prudential Balanced Advantage Fund.
    All balanced funds which invest minimum 65% in equities qualify as equity schemes under tax rules. Tax norms allow for zero long-term capital gains liability and tax-free dividends for equity schemes of mutual funds. The tax norms do not factor in the net exposure to equities after the use of equity derivatives to hedge.
    But some mutual funds also offer a variant of balanced funds which in law are equity funds but which have a net equity exposure of less than 65%. Typically known as balanced advantage funds these schemes provide tax benefits to investors by having 65% of their corpus as investments in equity shares at all times and additional significant exposure in the equity derivatives market which hedge a good part of their equity holdings.
    For instance, ICICI Prudential Balanced Advantage Fund, which had assets to the tune of 184 bln rupees in April, had 65.11% of it invested in equities and the balance in debt securities and money market instruments. But the net equity exposure of the scheme was 50.11% since it had equity derivatives positions in the form of stock futures and index futures and options to the extent of 15% of its AUM.
    The trend of robust inflows in balanced funds may continue for some more time till the current market rally lasts, according to Aditya Birla Money's Mahajan.
    Gold ETFs or exchange traded funds, which offer investors a non-physical way of investing in gold, have been steadily losing assets in the last four years. In Jan-May of current year, too, gold ETFs have seen net outflow of 3 bln rupees.
    The table below lists the trend in net inflow in select mutual fund
categories in the last few calendar years
            Net inflow (in bln rupees)
       Balanced   Equity   Income   Gold ETFs
       --------   ------   ------   ---------
2017*     286      335      230       -3
2016      247      463     1375       -9
2015      214      851      178       -9
2014       57      490      285      -17
2013      -11      -87      270      -18
2012       -4     -141      567       18
2011       13       68     -122       40
2010        8     -162     -835       17
* till May                       
Data source: AMFI

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