Why You Should Be Wary Of Balanced Funds Paying Monthly Dividends?
Mutual Fund houses have been using unique tricks to expand their Assets Under Management (AUM) these days. Until recently, many of them were launching New Fund Offers (NFOs), selling old wine in a new bottle. Now that the Securities and Exchange Board of India (SEBI) has been categorically expressing its disappointment about this practice, mutual fund houses are trying to promote existing schemes in an unhealthy way.
As you may be aware, equity valuations have become expensive nowadays, thanks to a continuous flow of foreign capital and sustained buying by domestic investors as well. Under such a scenario valuation, cautious investors usually shy away from investing in equity oriented funds. To attract them, some fund houses have been promoting balanced funds as regular dividend paying funds.
Although this policy is argued to have been adopted only for “existing folios”, the fund houses haven’t been denying the possibility of continuing with this practice. In fact, a few of them have intelligently distributed a dividend at a fixed rate for a few months, and now have been communicating informally through distributors and agents that such payments are likely to continue even in future. They have been backing this argument claiming that they have a distributable surplus which will suffice for months to come.
Suppose a fund house claims to be in a position of paying 1% dividend every month, please understand it’s not suggesting that it will protect your capital and still pay 1% every month over and above your principal. If markets were to drift down substantially from here onwards, it’s likely that you would make losses in principal as the Net Asset Value (NAV) of a fund might go down for two reasons. The first being the payment of regular dividends, and the second is the fall in the market value of the securities held in the portfolio. Another disadvantage of falling for the appeal of regular dividend distribution is that your investments won’t yield optimal rewards as the fund manager may continuously focus on the payouts.
Keep this in mind
Equity oriented balanced funds can play a vital role in your portfolio and also help you earn competitive returns without exposing you to extreme volatility. However, if you treat them as monthly pension plans or regular dividend paying funds, you might get nasty surprises. If you are seeking to generate some steady income for a specified period, you should opt for Systematic Withdrawal Plans (SWPs) offered by mutual funds.
From time to time, PersonalFN has not only guided investors on how investing in balanced funds can make a difference to their investment portfolio but has also explained thoroughly the right approach to take exposure to them. The articles below may enlighten you on the subject.
A balanced approach to mutual fund investing!!
Balancing your portfolio with balanced funds
Balanced Funds: A Good Way to Start Your Mutual Fund Investments
Are you well equipped to beat the stock market volatility?