Balanced funds that had a robust run in 2017 on the back of investor interest and tax-free dividend are now witnessing a slowdown, in terms of inflows, since the last two months.
According to the data on Association of Mutual Funds in India, the inflows in the balanced fund category hit a one-year low of Rs 5,026 crore last month and Rs 7,614 crore in January. In comparison, inflows in the underlined category stood at Rs 9,756 crore in December 2017.
In January, the decline in net inflows was mainly on account of redemption while the sales figure dropped in February.
Mutual fund managers attributed the fall in inflows in balanced funds to 10 percent dividend distribution tax announced by the Finance Minister on equity schemes and a correction in the markets.
“The primary reason for the fall in inflows in balanced funds is the 10 percent DDT (dividend distribution tax) announced in the Budget but this move will help stop mis-selling of balanced funds that declare a monthly dividend,” said Jimmy Patel, Chief Executive Officer, Quantum Mutual Fund.
The current tax treatment, valid till March 31, 2018, is that dividends from Balanced Funds are tax-free, which means, there is no dividend distribution tax (DDT). The Union Budget will changed that effective April 1, 2018. So, there is a DDT of 10 percent.
Post Budget, most experts had said that the surge in the balanced funds was on account of mis-selling which was likely to reduce after the Budget proposal.
Apart from DDT, the market correction and the bond yields have further dampened the investor interest in balanced funds.
In February, the month of budget, market had fallen 5 percent.
In the last three years, balanced funds have enticed investors assuring monthly dividends. As per dividend data on Moneycontrol, ICICI Balanced, UTI Balanced, HDFC Prudence, Kotak Balanced Fund, Tata Balanced Fund, Birla Balanced Fund and SBI Balanced Fund have declared dividends on quarterly basis.
“Usually, lot of investors in balanced funds are first-time investors. They look at balanced funds as they are a good option for regular dividends. Now that market has corrected after a long time, investors must be wanting to take a break,” said a Mumbai-based mutual fund advisor.
“Balanced funds are still a good investment option but not for investors who are looking for regular dividends,” he added.
Balanced funds had witnessed more than double inflows as compared to the previous financial year. The category saw inflows of Rs 83,003 crore in the first eleven months of the financial year, compared to Rs 36,610 crore in 2016-17.
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