All asset markets never move in a straight line, and are often prone to swings due to various events taking place in the markets all the time. In the anticipation of the US Fed rate hike, the last few months for the equity and debt markets were very choppy.
That the event passed off smoothly and well for the Indian markets was on expected lines due to its strong and robust domestic strength. But this underpins the point that investors can ride out of such volatility by taking exposures to the right kind of products like balanced funds.
In a bumpy market, especially when the outlook for financial assets over the longer term is quite bullish, the balanced funds help even out the volatility in the markets. As these funds invest in both equity and debt, they can help even out the fund’s performance. When the equity markets are not doing well, the debt portion provides the cushion needed for the overall balanced fund portfolio.
But with the US Fed hiking rates by 25 basis points— the big event everyone was waiting for is now behind us. The equity markets have recovered from the selling pressures of the last few months largely by foreign investors. Domestic investors continue to repose the faith in financial assets, and that’s a good sign.
In such times, balanced funds tend to be prudent investment choices. First, balanced funds with an asset allocation model built into the fund strategically increase exposures to equity when the markets are down. Many a times domestic investors tend to let go off opportunities to invest in a falling market for fear that they may incur losses if the market falls lower.
But balanced funds can cushion out this choppiness in the equity portion, largely due to their debt exposures. In extreme market conditions, when the markets are falling, many leading investment gurus like Warren Buffett and Howard Marks know the value of buying assets when they are cheap. Balanced funds offer that opportunity and are tailored to make the most of these falls by increasing exposures to equity.
At the moment, the markets have recovered, but choppiness cannot be completely ruled out. That’s because commodity prices are lower and profitability of some of the frontline commodity companies are taking a hit. Further, global growth rate is still not out of the woods, and Indian merchandise exports too contracted by about 24 per cent last month.
But the Indian economy is favourably poised due to the strong macro-economic fundamentals like lower inflation. Earnings growth will recover, but this recovery will be slow and gradual. It would not be a V-shaped recovery that we are all hoping for. In other words, this is a slow compounding market, which warrants investors to remain invested and even make fresh allocations to dynamic asset allocation funds on a bumpy stretch.
Dynamic balanced funds have worked wonderfully well in all market conditions. Returns of these funds have been quite good in the short and long-term markets. Over a 10-year period, balanced funds delivered returns of 12.71 per cent as on September 2015 as one can see from the Crisil–AMFI Hybrid Fund Performance Index. This was the period when markets saw extreme bull and bear conditions, especially the worst performing period of 2008.
Even in the short time frame of a year, the debt portion has been holding up returns. The past year bears evidence to that. While the Sensex lost about 6 per cent, the Crisil–AMFI Hybrid Fund Performance Index delivered positive returns, and was up 9.65 per cent during the same period.
This is the right time to get the best out of these funds as they help smoothen the volatility in the equity. They are not usually aggressive performers in a rising market, but in uneven and bumpy market conditions and with global economy taking a while to stabilise, this appears to be one of the most suitable fund categories for investors.
In fact, in the immediate horizon of two-three years, balanced funds are ideally poised as they can make sizeable accumulations in equity when the markets enter a sluggish phase. On the other hand, when equities get too overpriced, these funds tend to opt out of them and into the relatively less volatile pastures of debt. And there are many investors who are taking the opportunity that a balanced fund offers.