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Warning: Balanced Fund WRONGLY Sold As Guaranteed Income Scheme

It is indeed unfortunate, but true... in the coming months numerous mutual fund investors could experience extreme shock.


Many investors have been made to switch their capital from Fixed Deposits to Balanced Funds.

Investors, whose primary objective is to earn safe and regular income, are being misled into investing in Balanced Mutual Fund Schemes — with the false promises of risk-free and guaranteed regular dividends — by unscrupulous distributors and advisers.

And, it is indeed disappointing, that mutual fund companies are doing nothing to stop this blatant mis-selling. This year almost Rs.50,000 crores have been invested in Balanced Funds till date. This is on top of the thousands of crores invested in 2016 itself.

Let's see where the problem lies:

As you are well aware, in recent times the interest rates on bank fixed deposits and post office schemes have dropped quite sharply. As such, people are searching for alternatives that could earn them better returns.

Taking (undue) advantage of this low interest rate scenario, agents are advising these prospective investors to invest in Balanced Funds and receive regular dividends.

However, if you analyze the profile of these investors, four key features stand out.

a. Many of them are risk-averse investors. They cannot afford to see their capital depreciate. Some have key requirements coming up in the near future e.g. house purchase, children's education, etc. Some are retired, while some very senior citizens.

b. Many of them want regular income from their investment like the monthly interest from Post Office Monthly Income Scheme, or the quarterly interest from Bank Fixed Deposits / Senior Citizens Scheme.

c. Many investors have large lump sum money to invest. This strategy is fine for fixed deposits and other pure debt-based investments.

d. Many of them want their investment to be liquid. In case of any emergency, they should be able to withdraw their capital with maximum ease and minimum penalty.

Balanced Mutual Funds fail to match these requirements. Hence, they are NOT THE RIGHT PRODUCT for such investors.

Invest with (utmost) care! Balanced mutual funds are high-risk schemes.

What are Balanced Funds?

Balanced Funds are mutual fund schemes, whose objective is to invest around 65-75% of the corpus in equity markets and the balance 25-35% money in the debt markets. The investment in equity is geared towards earning high returns. And, investment in debt markets earns steady income and acts as a cushion against the volatile equity market.

Thus, Balanced Funds offer the twin advantage of automatic asset allocation and tax-efficient returns (especially on the debt portion of the total corpus).

However, given the high exposure to equity
- this scheme is NOT for risk-averse investors, who don't have the capacity to bear any erosion in their capital
- during downturn in the equity markets, this scheme may not declare any dividends
- since a large portion of the investment is in equity, small and regular investment (i.e. systematic investment planning or SIP) is the recommended strategy for Balanced Funds
- though the capital can be redeemed any time and the exit load is generally 1% for the first year only, there may be losses in the early years if the equity markets are in a bear phase.

In other words, Balanced Funds suit the investors who (a) have some risk appetite to invest in the equity markets, (b) do not need the money for at least 4-5 years, (c) have small sums to invest every month and (d) don't require regular income to meet their daily living expenses.

This huge MISMATCH between the 'Product Profile' and the 'Investor Profile' is bound to create serious problems.

When the regular dividends dip or are skipped, many people may not be able to meet their everyday expenses. (In fact, as I have repeatedly warned, in mutual funds there is NO SUCH THING AS DIVIDEND. What is termed as "dividend", is merely distribution of a part of the accumulated capital.)

When the NAV falls due to downturn in the equity markets, many people may see their capital depreciate.

When the investment is redeemed during dips in the equity market, many people may suffer actual losses.

It would indeed be a tragedy that due to this mis-selling, people will lose confidence in the mutual funds, which are otherwise an excellent investment option. All that is required is to match the "right scheme" with the "right person".

Like any other product, Balanced Mutual Fund is a really good scheme... but for a certain class of investors only

Concluding: Don't be lured by the UNCERTAIN dividends. Don't be fooled by the false promises of SAFETY of your capital. Contrary to false propaganda, Balanced Funds are neither risk-free nor deliver assured regular returns.

An Investment In Knowledge Pays The Best Interest ~ Benjamin Franklin

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