Easy way to invest

Balanced funds (also called hybrid funds) maintain a balance between equity and fixed income. The fixed income part is generally corporate or government debt of various types. These funds are mandated to stick to a fairly well-defined ratio between these two types of assets. This simple structure is more conservative in returns than equity funds, but it compensates with some great advantages.

To maintain the ratio, the fund manager has to periodically sell whichever investment has done better. With the proceeds of the sale, he has to buy the other type of investment to regain the balance. While this sounds counter-intuitive to the average investor, it ensures that the profits from equity are being regularly realised and protected by investing them in safe debt investments. When the equity markets are falling, it ensures that you are buying equities when they are cheap. Invariably, this is the best strategy to combine profits with safety in the long term. However, individual investors rarely have the discipline to implement it, since it is always counter-intuitive to sell whatever is rising and buy whatever is falling.

Over a complete rise-and-fall market cycle, this invariably produces decent returns with far less volatility and heartburn. Over the last five years, the average equity diversified has given returns of about 12.26% per annum and the average equity-oriented balanced fund has produced 10.16%, but with lower volatility.

Not only does this balanced strategy get stable returns, it is also more tax-efficient for a fund to implement it. For instance, every time you sell you would pay capital gains tax. When funds buy and sell, there’s no tax liability to the end-investor. Two, when you hold any kind of fixed income investment yourself, it is liable for long-term capital gains tax, since only equity income is exempt from that. However, if a balanced fund keeps its equity allocation above 65%, then the investor’s entire investment is treated as equity for tax purposes and thus becomes free from long-term capital gains tax.

So, it does not make sense for the sensible investor to ignore balanced funds. Here, we present you with a few excellent options.

The author is CEO, Value Research

Canara Robeco Balance: Rising performer

This fund has a long and complicated history. It is the product of three balanced funds of two asset management companies -Canbank Mutual Fund (now Canara Robeco) and GIC Mutual Fund. In 2008, the fund was merged with Canara Robeco Balance II and the final entity has been named Canara Robeco Balance.

Due to the lack of continuity in management, it’s tough to nail down this one’s style. And since December 2007, there have been three fund manager changes, with the current one taking over in July 2008. At times this fund has been a bit too bold. A 41% allocation to just one sector or 20.83% allocation to one single stock are two instances.

Yet, there have been times when it has moved to the other end of the spectrum. In certain periods, the equity-debt allocation crossed the defined limits. October 2007 to January 2008 is one such example when the equity allocation averaged at 80%. Ditto during August-December, 2005. But the risk was mitigated to a small extent by the heavy large-cap exposure.

But since July 2008 (when the current fund manager took over), there has been a significant decline in large caps and the equity allocation has also begun to dip. But at the same time, he has increased the number of stocks in the portfolio from around 30 in June to 43 in December and 39 at present.

On the debt side, the fund is dabbling more in long-term paper probably expecting interest rates to fall. The fund at one time bought substantial low quality paper, but that was a long time ago. Going by its current ownership, it does not seem likely to repeat that move.

Over the past 15 years, the fund has outperformed the category average in 9. Its performance in 2007 was just about average but it has been holding its own in the downturn in 2008. For instance, in the September quarter when most funds delivered negatively and the category average was -3.17%, this fund returned almost 0.80%. Although the fund has not been as impressive as its peers in the rising markets, its ability to contain downside makes it a worthwhile choice for long-term investors. Its return of around 14.60% over the five-year period ending on January 31, 2009 is ahead of the category by 4%.

DSP BlackRock Balanced: A safe player

It’s safe to say that this fund has historically been an above average performer. Yet, the fact that it does not turn heads is also an accurate observation. But lately, the fund manager has proved that he has the ability to do so. In the last bull run (June 15, 2006 – January 8, 2008), the fund managed a top quartile performance with an absolute return of 55.85%. And in the bearish phase that immediately followed, it has managed to fall less than the category average.

This is a fund that plays it safe. It, by and large, sticks to its equity allocation as stated in the mandate but there have been occasions where it has dipped to less than 65%, but never more than 75%. It has always maintained a bias towards large caps, barring 2007, when it lowered the exposure to large caps to take part in the mid-cap rally. From around half (52.28%) of the portfolio dedicated to large caps in January 2007, it brought it down to nearly 39% in September 2007.

But investors don’t have to worry, as seeing the adverse market conditions, the fund manager again moved up the large-cap exposure to account for nearly 61% at present.

It stays well-balanced across sectors and casts its lot with defensives. While healthcare and consumer non-durables are prominent, infotech has always been its favourite. The fund has maintained an exposure to Infosys and SIP Technologies (unlisted) since its launch.

The diversification also extends to the number of stocks. It has averaged at around 78 in recent times with the top five holdings concentration being way below the category average. Since January 2008, its top five stocks hardly accounted for around 15% of the total corpus whereas the category average was almost 24%.

On the debt side, the fund employs all debt instruments available in the debt market. Unlike its peers, it has refrained from extensively investing in debenture and commercial paper. Rather, it invests in floating rate papers of all kinds and government bonds. This way, it is protected on the credit as well as interest rate side.

You will be well taken care of here if you don’t expect trailblazing returns. But then, one should not look for such returns in a balanced fund.

Magnum Balanced: Changing fortunes

This fund has left behind its days of brashness to evolve into a stable offering. In its first seven years, it failed to impress, barring 1999 when it delivered 192.51%, which was 100% higher than the category average. It was even way ahead of the average diversified equity fund return of 127.78%. The fund was actually the worst performing fund of its category in a row for three years till 2002. But 2003 saw a change in its fortunes. Since then, it has consistently outperformed the category average and currently is the best fund under the hybrid equity-oriented category over the five-year period ended January 31, 2009. Its annualised gain of 16.79% over this period is ahead of its category by nearly 6%. Despite a mandate allowing it to go headlong into equity, the fund has never done so. In fact, its highest exposure has been at around 77%. But within the equity allocation it can get quite aggressive and has the mark of a risk taker.

The fund may dabble in stocks, which other fund managers prefer to stay away from. Such as being relatively overweight in the construction sector since 2005 with exposure to real estate companies like Nagarjuna, Akruti City, Unitech Ltd, IVRCL Infrastructure & Projects, and Puravankara Projects. Although, the exposure to the sector has been pruned down to nearly 7%, it is still higher than the category average of around 3%. During the tech boom, exposure to technology went as high as 38.92%. But such high allocations have been toned down over the years. Currently, the fund looks fairly diversified with the top three sectors accounting for nearly 31%, in line with its category. Also, earlier instances of a particular stock cornering more than 10% of net assets too have been subdued in the recent years. The number of stocks, which at times has been around 25, has averaged at around 47 in the past year.

On the debt side, the fund sticks to high quality paper and prefers debentures and certificate of deposits of banks and financial institutions. Investors get drawn to the fabulous performance during bull runs. But they must be prepared to sit tight when the market crashes. This fund does have an aggressive tilt and tends to get hit hard.