A touch of balance

In 2007, when most individual portfolios were tilted in favour of equities—thanks to the rally in the stock markets— investors barely looked at balanced funds. Their performance lagged behind equity funds. Cut to 2008. With equity markets running into rough weather, balanced funds are back in favour— and rightly so. Says Viraj Ghatlia, Head (Financial Planning & Wealth Advisory), ASK Wealth Advisors: “Balanced funds are considered middle-of-the-road investments as they provide investors an opportunity to diversify across two asset classes—equity and debt. When the equity market goes down, they tend to perform better than equity funds. In a bullish market, though, they lag behind.”

Typically, balanced funds invest 65 per cent of their corpus in equities and the rest in debt. In an uncertain market, such as at present, when the equity component is shrinking, the debt side of the portfolio acts as a cushion against the fall.

Says Jimmy A. Patel, CEO, Edelweiss Asset Management: “While they are not exactly a ‘safe’ avenue, balanced funds carry a lower risk on the riskreturn spectrum compared to pure equity funds.” And in a volatile market, they serve to lend stability to your portfolio. Experts feel that investing in balanced funds in the current scenario will give a two-fold benefit: asset class diversification coupled with rising interest rate income.

Says Ritesh Sheth, Fund Manager, SBI Mutual Fund: “First, it helps investors to graduate from a savings mindset to an asset class one, and, secondly, given that the inflation rate is higher than interest rates, wealth is destroyed if money is kept in a savings account. Balanced funds help build an equity portfolio, which, over the long term, can deliver better returns.”

Showing their mettle

But it’s in a down market that balanced funds help cushion the blow. Over the past year, while the equity market has gone nowhere, balanced funds have returned an aboveaverage performance. Says Patel: “Last year, the CRISIL Balanced Fund Index—a typical benchmark for most balanced funds—generated returns of around 5.62 per cent for a one-year period. During the same period, the S&P Nifty generated a return of just 4.9 per cent.”

Balanced fund managers also alternate between asset classes depending on market conditions. A fund loaded with equity can lighten up and re-invest in debt when equity markets look shaky. Says Apoorva Shah, Fund Manager, DSP Merrill Lynch: “Another distinct advantage of balanced funds is that they continuously rebalance the portfolio to ensure that the broad asset allocation is not disturbed. As fund managers balance the pre-determined equitydebt ratio, they have to regularly book the gains clocked. A fund manager effectively buys equities in a falling market and books profits when the markets rise. This also allows investors to maintain an appropriate asset mix without having to rebalance their portfolios on their own.” Therefore, if you want a mix of both asset classes you must consider balanced funds, especially with a 3-5-year horizon. And you can forget about market timing.

Out of 32 balanced funds, 20 have been around for five years. And over this period, their performance has not been found wanting. On an average, they have given 23-24 per cent returns. The top three funds have been consistently good performers and investors can consider adding them to their portfolios.

SBI Magnum balanced

This fund invests in a good mix of large- and mid-cap stocks. Its performance over the past five calendar years speaks much about its ability to generate returns. With its NAV appreciating 17.32 per cent CAGR (compounded annual growth rate) and 32.05 per cent CAGR over the last 3-year and 5-year periods, respectively, the fund has outperformed its peers by some distance.

As on July 31, 2008, its top three sectors—technology, energy and financial services—accounted for about 30 per cent of its portfolio. If you want some concentrated stock investment action and performance to boot, this fund is your answer.

Principal child benefit

Every investor desires a fund that can deliver excellent returns year after year. That’s a tough task, but this fund has lived up to such expectations. With an NAV appreciation of 27.10 per cent CAGR and 29.03 per cent CAGR over the 3-year and 5-year periods, respectively, the fund has given returns unmatched even by some diversified equity funds. Being very conservative, the fund has less than 59 per cent of its total investments in equity. It is suitable for investors with a moderate appetite for risk.

HDFC Prudence

This fund easily ranks as one of the top performers in the balanced funds segment. With high exposures to sectors such as financial services, pharma and engineering, the fund has delivered good returns over the years—its five-year annualised returns of 27.96 per cent makes it very attractive to investors. The fund has stuck to its large-cap orientation but also invested in midcap stocks. As on July 31, 2008, the fund has 75.27 per cent of its investments in equity, so expect it to be volatile for a while.