Beware of agents ‘mis-selling’ Balance Funds

Mutual Fund (MF) distributors including bankers and agents have been ‘mis-selling’ Balance Funds by pitching them to investors looking for regular returns. Investors are being (informally) assured 11-12 per cent, or higher, returns per annum, payable either on a monthly or a quarterly basis. This sales pitch seems to have the tacit approval of MF bosses as monthly or quarterly dividends are announced, trade sources in the know said.

This kind of high and regular dividend payouts could last as long as the bull run on the stock markets lasts. But if markets fall, even if only for a few months, gullible investors will be left with lower or no returns!

Incidentally, several Mutual Funds have separate Monthly Income Schemes (MIS), but they too don’t guarantee regular returns. Market regulator Sebi’s norms bar Mutual Funds from promising assured returns.

According to the Association of Mutual Funds of India (AMFI) data, assets under management (AUM) under the category of Balance Funds has more than doubled to ₹1,02,000 crore (rpt ₹1,02,000 crore) now from ₹ 42,695 crore (rpt ₹42,695 crore) only a year back.

Balance Funds generally invest 65-70 per cent of their AUM in equities and the rest in debt instruments (government securities/corporate bonds). As such, they do well during a bull run in equities and if the stock markets fall, debt instruments yielding a fixed return cushion the fall in the Balance Fund scheme’s value. But, since returns from equities could fluctuate sharply, Balance Funds are not quite suitable for regular returns, said a sub-broker in Patna who didn’t want to be identified.

He rued, “A large number of first-time investors coming to mutual funds from traditional savings products such as bank fixed deposits and small savings products, are misled to invest in Balance Funds. Since they want regular returns to meet their expenditure, debt funds, where returns fluctuate within a small band of single digits, will suit them. But they are lured by promises of higher returns in Balance Funds by unscrupulous bankers and agents.” If these investors burn their fingers due to a market fall, the MF industry will get a bad name, he regretted.

The sub-broker added, “As of now, helped by bull run, several Balance Funds, including HDFC Prudence, ICICI Balanced Advantage, UTI Balanced, DSP BlackRock Balanced, HDFC Balanced, Birla Balance and SBI Balanced have been paying either monthly or quarterly dividends.” Unscrupulous agents are taking benefit of this to mislead ignorant investors. If markets fall, dividends may not be paid as MFs can do so only out of profit made, as per Sebi’s rules, he pointed out.

To cite some figures, assets under management (AUM) of HDFC Prudence crossed ₹24,000 crore in May 2017 against ₹14,953 crore on December 31, 2016. ICICI-Prudential Balance Advantage Fund’s size crossed ₹19,000 crore in May 2017 from ₹16,486 crore in November 2016 and that of HDFC Balance Fund grew to ₹11,748 crore in May 2017 from ₹8,312 crore in December, 2016!

Are capital market regulator SEBI and the MF industry body AMFI listening?