For fixed income is balanced fund better than Fixed deposits

You cannot compare balanced funds with fixed deposits or post office schemes. More 65% of balanced fund assets are invested in equity or equity related securities which are subject to market risks; bank fixed deposits and post office monthly income scheme (MIS) are risk free investments. Though a number of balanced fund schemes have been paying regular monthly dividends over the past 3 years or so, there is no guarantee that they will continue to pay at the same payout rate (per unit) in the future and also whether they will continue to pay dividends every month.

As per SEBI regulations mutual funds may pay dividends only from the accumulated profits of the scheme. It is true that, some balanced fund schemes paid regular monthly dividends even in the bear market of 2015 / early 2016 (when the stock market fell by more than 20%). They were able to pay dividends in the bear market year because they had sufficient accumulated profits from the previous years; some schemes had to reduce the monthly payout rate in January and February 2016, probably the two worst months of the bear market. One cannot be sure if balanced fund schemes will continue to pay monthly dividends in future bear markets. Over a sufficiently long investment horizon (3 to 5 years or more), however, combined divided yield and capital appreciation from balanced fund investments, is likely to be higher than fixed deposit or PO MIS interest. However, there will periods of volatility, which investors should be prepared for. You should clearly understand the risk factors in balanced funds before investing.

Let us now discuss Bank Fixed Deposit versus PO MIS. The current 2 – 3 year FD rates offered by major banks are around 6.9 to 7%. The Post Office MIS rate is 7.6%. Purely from a interest rate standpoint, Post Office MIS is obviously the more attractive choice. However, please note that MIS tenure is for 5 years. There is a 1 – 2% penalty, if you withdraw your money before 5 years; if you withdraw your money within 1 year you will not get any interest. Further there is upper cap on investments in MIS. For single accounts, the upper limit is Rs 4.5 lakhs; for joint accounts, the upper limit is Rs 9 lakh. You should make a decision based on the factors discussed and your financial requirements.

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