Balanced funds offer you the most convenient solution to balance out stability and growth. Time and again, they have proved they can be your best friends 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 per cent 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.
Performance
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 per cent 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 shorter three-month period, the category of balanced funds have been able to restrict the losses to 4.5 per cent, much less than that of diversified equity category (-8.44 per cent) and the Sensex (-7.25 per cent).
And at the same time, they possess enough ammunition to generate great returns. The category boasts of annualised returns of 27.32 per cent during the last five years, which is not far off from the 29.72 per cent delivered by the Sensex. On a longer seven-year horizon, the category (16.52 per cent) 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 per cent 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 of 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 per cent, from 62 per cent in January 2007 to just 53 per cent by March.
Among others, DSPML Balanced and FT India Balanced have also cut down on equity. On the other extreme lies ICICI Prudential Balanced, which has increased its investments in stocks by close to 7 per cent to touch 72 per cent 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 per cent to 79 per cent. 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 funds 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 per cent 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 has been perceived as a wasted allocation, something that achieves little other than diluting the returns.
Even the fund houses have 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.
No dearth of choice
Even though the category is not huge, it offers enough good options.
In fact the launch of Optimix Financial Planning Multi Manager Fund of Funds (Plan E and F) has lent more diversity to it. These fund of funds attempt to combine the best of equity as well as debt funds from across the industry. Although we had balanced fund of funds earlier from Franklin Templeton, ICICI Prudential and Birla Sun Life, these funds restricted the investments to their own schemes.