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TACTICAL balanced funds, launched recently, appear to be worthy ideas that seem to suffer solely because of the built-in passive equity component. This may not be solely the fault of the asset management companies. In fact, they may have had no choice in this regard. This is because regulatory constraints seem to be forcing these funds to adopt such an approach.

It was first Pioneer ITI (later acquired by Franklin Templeton) that came out with a tactical balanced fund — PE Ratio Fund. Now, UTI has come out with its Variable Investment Plan. In both cases, the expected outlook for equities will decide the equity component. The outlook, in turn, will be determined by index values in the UTI's variable investment plan and PE ratio of Nifty in the case of FT India PE Ratio Fund. Unfortunately, the equity component will be invested in the Index. Index-investing has been singularly unattractive in India so far.

However, these funds do not have a choice. A better idea would be to divert the equity and debt component to the equity and debt fund managed by the same fund house. But, then, the tactical balanced fund cannot charge any expenses to the scheme. Under the Regulations, if the monies raised are invested in another scheme managed by the fund then expenses cannot be charged on the monies that are so invested. So, the balancing done by the fund manager will go unrewarded.

The alternative is for the tactical fund manager to manage everything — balance the equity and debt component in accordance with Index values as well as invest actively in equity and debt. This, however, may be a handful even for a skilled and experienced fund manager. Funds, of course, can have different managers to balance the fund and manage the equity and debt component. But this will lead to a rise in the costs of managing the scheme.

In this backdrop, there is a case for relaxing the regulations in this regard. Investments in other schemes by balanced funds or asset allocation funds may be allowed without curbing the right of funds to charge a fee. Of course, checks and balances need to be in place. In addition, the fee that can be charged can only be proportionate to the service rendered. Either which way, there is a case for a relook into this issue.

Suresh Krishnamurthy

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