Balanced Mutual Fund: An overview

Mutual funds are traditionally classified by the investment asset class they own. Mutual funds which own only stocks (Equity) are called Equity mutual fund. Mutual funds which own only bonds are called bond fund. Mutual funds which own both bonds and stocks are called hybrid fund.

Balanced Mutual fund is a hybrid Mutual fund which invests in both equity and bond. Typical Balanced fund invests 65% in stocks and 35% in bond.

Benefits of investing in Balanced Fund:

•     Balanced fund provides twin benefit of growth (from equity component) and stability (from debt component)
•   Balanced fund offers automatic re balancing- Assume equity is growing faster than the bond then weight of equity crosses 65%(prescribed limit); then fund manager would book profit from equity and invest the same in bond
•  Balanced fund offers lower volatility compared to an equity funds
•  Balance fund offers better liquidity and more tax efficient than the bond funds

Potential return and tax effect:

•  Balanced fund over last 5 years have generated a CAGR return of 15-16%; the realistic long term expectation going forward could be close to 12%.
•  Balanced fund are treated as equity fund from tax perspective. Short term capital gain tax of 15% is applicable if redeemed (withdrawn) within 1 year and long term capital gain tax of 0% is applicable  if redeemed (withdrawn) after 1 year

Potential risk

• Balanced fund invests 65% in equities which is subjected to market volatility and hence the fund return would be more volatile compared to a bond fund/bank FD

Conclusion: Balanced fund offers automatic re balancing which allows your investment portfolio to be more balanced in different market conditions.  Balance fund offers good return, provides diversification benefit, offers flexibility and are tax efficient (long term capital gain is zero percent).Balanced fund comes handy in portfolio building and is a good option for first time equity investors.

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Bank FD vs Bond Mutual Fund: Taxation

Bank FD & Bond Fund both are fixed income securities. The most ignored part while investing in fixed income securities is the effect of taxation. The blog highlights the differences

Tax Effect on Bank FD

Taxes are paid on accrued interest and payable as per the individual tax brackets.

Ex Mr X invest Rs 10 Lac in a bank FD yielding an interest rate of 6%; Mr X is in a 30% tax bracket; then Mr X has to pay an average tax of Rs 18,000/Annum. The effect of tax over 5 year is as shown below

	Year 1	Year 2	Year 3	Year 4	Year 5	Total
Interest Income	60,000	60,000	60,000	60,000	60,000	3,00,000
Tax Effect	Income	Income	Income	Income	Income
Tax Payable rate	30%	30%	30%	30%	30%
Tax Payable	(18,000)	(18,000)	(18,000)	(18,000)	(18,000)	(90,000)
After Tax Interest Income	42,000	42,000	42,000	42,000	42,000	2,10,000

Tax Effect on Bond Mutual Fund:

Taxes are paid only on redemption/withdrawal and the rates depend on the nature of gain. For Bond fund any redemption within three years is considered as short term capital gain (taxed at applicable individual tax bracket) and redemption after 3 years is considered as long term capital gain (taxed at 20% adjusted for indexation benefit- works out close to 10%)

Ex Mr X invest Rs 10 Lac in a bond mutual fund and decides to withdraw 6% income on yearly basis (to match Bank FD Cash flow) ; Mr X falls in a 30% tax bracket; then Mr X has to pay an average tax of Rs 1,730/Annum. (91% lower than bank FD)

	Year 1	Year 2	Year 3	Year 4	Year 5	Total
Withdrawal	60,000	60,000	60,000	60,000	60,000	3,00,000
Capital Gain (at 6% return)	3,396	6,600	9,623	12,474	15,165
Tax Effect	STCG	STCG	STCG	LTCG	LTCG
Tax Payable rate	30%	30%	30%	10%	10%
Tax Payable	(1,020)	(1,980)	(2,887)	(1,247)	(1,516)	(8,650)
After Tax Interest Income	58,980	58,020	57,113	58,753	58,484	2,91,350

 *STCG-Short term capital gain; LTCG- Long term capital gain

Conclusion: Bond Mutual fund taxes are applicable only on redemption while on bank FD’s taxes are applicable on accrued interest; Bank FD taxes would be 10 times higher than that of bond mutual fund. Bond Mutual fund provides higher return, offers better liquidity and most efficient in terms of taxes compared to Bank FD.

UTI MNC Fund – SIP Performance

UTI MNC Fund is a theme based equity fund launched in the year 1998; Based on the management style UTI MNC fund can be categorized as multi cap fund (as of the latest factsheet fund has 53% exposure to Large cap; 40% exposure to mid-cap and 7% exposure to small cap). Since inception the fund has generated a CAGR return of 17.92%.

I have worked out Systematic Investment Plan (SIP) return assuming investment of Rs 10,000 every month at NAV per unit of the scheme as on the first working day for the respective month from year 2006 for different time period.

One Year SIP return of UTI MNC from FY 2006 is as shown in the table below

Period Invested Amount Market Value Gain/Loss Return 2006 1,20,000 1,29,316 9,316 16% 2007 1,20,000 1,50,083 30,083 48% 2008 1,20,000 96,377 -23,623 -49% 2009 1,20,000 1,72,943 52,943 77% 2010 1,20,000 1,37,914 17,914 30% 2011 1,20,000 1,13,158 -6,842 -13% 2012 1,20,000 1,35,493 15,493 26% 2013 1,20,000 1,35,358 15,358 26% 2014 1,20,000 1,66,451 46,451 69% 2015 1,20,000 1,21,886 1,886 3% 2016 1,20,000 1,14,019 -5,981 -11%

*CY 2009 & CY 2014 has been great year for UTI MNC fund generating above 50% * 4 out of the last 11 years return has been lower than the long run average FD return of 8%

Three Year SIP return of UTI MNC from FY 2006 is as shown in the table below

Period Invested Amount Market Value Gain/Loss CAGR Return 2006-08 3,60,000 2,81,440 -78,560 -18% 2007-09 3,60,000 5,05,495 1,45,495 22% 2008-10 3,60,000 5,78,131 2,18,131 31% 2009-11 3,60,000 4,43,005 83,005 14% 2010-12 3,60,000 4,53,207 93,207 15% 2011-13 3,60,000 4,50,137 90,137 15% 2012-14 3,60,000 6,32,860 2,72,860 36% 2013-15 3,60,000 5,59,161 1,99,161 29% 2014-16 3,60,000 4,04,025 44,025 8%

*Median three year SIP return since CY 2006 stands at 15.3% * 2 out of the 9,three year period return has been lower than the long run average FD return of 8%

Five Year SIP return of UTI MNC from FY 2006 is as shown in the table below

Period Invested Amount Market Value Gain/Loss CAGR Return 2006-10 6,00,000 10,03,448 4,03,448 20% 2007-11 6,00,000 8,31,992 2,31,992 13% 2008-12 6,00,000 9,90,602 3,90,602 19% 2009-13 6,00,000 9,31,243 3,31,243 17% 2010-14 6,00,000 12,07,264 6,07,264 26% 2011-15 6,00,000 11,39,697 5,39,697 24% 2012-16 6,00,000 8,96,648 2,96,648 15%

*Median five year SIP return since CY 2006 stands at 19% * UTI MNC fund 5 year SIP return since CY 2006 has generated higher return than long term average FD return of 8%

Ten Year SIP return of UTI MNC from FY 2006 is as shown in the table below

Period	Invested Amount	Market Value	Gain/Loss	CAGR Return
2006-15	12,00,000	36,36,233	24,36,232	19.5%
2007-16	12,00,000	29,93,582	17,93,582	16.4%

UTI MNC fund SIP return for CY 2006-15 stands at a CAGR return of 19.5%; while CY 2007-16 stands at a CAGR return of 16.4%.

Conclusion: Equity markets generates good return over long run; it’s very difficult even for professionals to time market; However a disciplined approach of investing through Systematic Investment plans over long term can create significant value. Investors should choose right mix of fund suitable for them based on their financial position & requirement. UTI MNC fund is one of the good performing fund in multi cap segment over relatively longer period.