Balanced funds bouquet

Updated: Apr 29 2007, 07:53am hrs
Balanced funds offer you the most convenient solution to balance out stability and growth. Time and again, they have proved that they can be your best friend during tough times. What makes balanced funds a wonderful investment proposition is their structure which works in the interest of investors in more than one way. Firstly, around 25-40% debt allocation ensures that you are never taking undue risks by going overboard with equities. Secondly, regular re-balancing enables profit-booking as and when the equity markets go up. This means that the gains are realised and transferred to safer debt instruments regularly. Therefore the message is clear; cushion on the downside, but a little compromise on returns. The performance of balanced funds, at least the good ones, is a testimony to that.


The category of balanced funds has been able to negotiate the uncertainty of the last one year much better than diversified equity funds. An average balanced fund has delivered returns in excess of 2.5% in the last one year (as on April 5, 2007), while an average diversified equity fund has been struggling with marginal losses. Even on a short three-month period, the category of balanced funds has been able to restrict losses to 4.5%, much less than that of diversified equity category (-8.44%) and the Sensex (-7.25%). At the same time, they possess enough ammunition to generate great returns. The category boasts of annualised returns of 27.32% during the last five years, which is not far off from the 29.72% delivered by the Sensex. On a longer seven-year horizon, the category (16.52%) has actually exceeded the returns of the Sensex (15.26%).

While these numbers pertain to the category as a whole, the performance of some individual funds presents even a more convincing picture. For example, with annualised returns of 36.75% over the last five years, HDFC Prudence can give even a pure equity fund, a run for its money.

Different Strokes

Different funds have reacted differently to the market fall in February. While some have cut down their equity allocation substantially, others are looking at it as a buying opportunity and tanking up on stocks.

Canbalance II, for example, has reduced its equity allocation by 9%, from 62 in January 2007 to just 53% by March. Among others, DSPML Balanced and FT India Balanced have also cut down on equity. On the other extreme lies ICICI Prudential Balanced has increased its investments in stocks by close to 7% to touch 72% over the last two months. Similarly, Sundaram BNP Paribas Balanced has also grabbed this opportunity to buy stocks. Its equity allocation has shot up from 73% to 79%. There has also been a change in its fund manager. After the departure of Anoop Bhaskar, N Prasad has taken over the fund. He has earlier managed this fund for brief periods on two occasions.

Asset Size

Despite the kind of benefits that balanced can offer they have not been able to attract any significant amount of investors' money. The whole category (comprising 34 funds) manages assets worth just over Rs 6,800 crore. Just to put things in perspective, the category of diversified equity funds currently manages assets worth over Rs 1 lakh crore. Even this small asset base is heavily skewed in favour of the top three funds, which account for 63% of the category assets.

In fact HDFC Prudence, the largest and arguably the best balanced fund, alone accounts for a third of the assets. This can also be attributed to the fact that the last few years have clearly belonged to equities, and even a small allocation to debt was perceived as a wasted allocation, something that achieves little other than diluting the returns. Even the fund houses largely focused their energy on launching more and more equity funds, while the balanced fund launches have been far and few. But the two steep market declines in the recent past (the ones in May 2006 and February 2007) demonstrate how valuable this debt allocation can be to preserve returns. And if this kind of uncertainty prevails for an extended period of time, the balanced can emerge as an attractive investment proposition, and more investors may prefer them instead of pure equity funds.

The author is CEO, Value Research