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Balancing your portfolio with balanced funds
Jun 30, 2011

The task of investment planning is rather complex in today's arena, and with the host of investment products available in each asset class - equity, debt and gold, the task gets convoluted further more. Very often, many of you investors either in haste, confusion, or sheer exuberance created by your brokers / agents / relationship managers invest in all these asset classes in haphazard way thus defying the objective of effective investment planning. Even when it comes to asset allocation, there's a lot talked about it but very few adopt the prudent approach because the sheer exuberance created by glamorous business channels often sway you away from the core essence of allocation.

Remember it is the hard earned savings that you invest, and hence it is imperative that you deploy your savings systematically in a disciplined manner. It is vital that you consider the following factors which can facilitate prudent investment planning and asset allocation:

  • Age

  • Income

  • Expenses

  • Nearness to goal

  • Risk appetite
Yes we do recognise that this can be a daunting task as numerous exhaustive calculations need to be performed (for effective investment planning and asset allocation). But you have a way out as one can follow a simple thumb rule for asset allocation as well - which is 100 minus your age. So, for example if your age is 30, 70% (100 - 30) of your money can be invested in equity and the rest 30% can be invested in debt instruments; and doing so you would be classified as a aggressive investor, who assumes more risk.

It is noteworthy that following the aforementioned facets of asset allocation or even the simple thumb rule provides you the under mentioned advantages along with the ultimate objective of wealth creation:
  • Congruent investments made in tandem with your age, income, expenses and financial goals

  • Diversification between asset classes

  • Hedge against downside risks experienced by either of such asset classes
The "balanced funds" category in mutual funds, entails in them this benefit by providing you an effective asset allocation, while you are invested in a single avenue of investment, and offers you the following advantages:
  • Shift across two asset classes depending upon the investment opportunities in the market

  • Hedges your portfolio when one respective asset class experiences turbulence

  • Enforces discipline by maintaining a pre-determined asset allocation (generally 65% in equity and the rest 35% in debt, thus maintaining an equity orientation for tax status which other equity funds enjoy)
And all this more importantly is managed by professional fund managers who have rich experience in research & analysis along with fund management. So, you are left with less stress of ascertaining where the equity and / or debt markets are heading, economic scenario, investor sentiments etc. But one needs to be aware that since a dominant portion of its portfolio is skewed towards equity you need to assume a high risk before investing in them.

Now having assessed the advantages of investing in balanced funds, let us see how they have fared against the diversified equity funds.

Report Card
Scheme Name 1-Yr (%) 2-Yr (%) 3-Yr (%) 5-Yr (%) Since Inception (%) Std. Dev (%) Sharpe Ratio (%) Debt & cash (%)
Balanced Funds
HDFC Prudence (G) 13.4 24.9 19.8 20.4 19.3 7.56 0.15 74.3 25.7
Reliance Reg Savings-Balanced (G) 7.5 16.8 17.3 15.2 14.0 7.55 0.12 74.2 25.8
Birla SL '95 (G) 12.0 16.3 15.4 17.2 23.4 7.23 0.10 64.5 35.5
Tata Balanced (G) 9.7 17.3 12.9 16.6 16.7 6.96 0.08 72.8 27.2
UTI Balanced (G) 8.4 13.0 10.8 12.0 15.9 6.66 0.06 72.0 28.0
Category Average* 8.2 11.5 8.7 12.3 14.1 6.83 0.03 - -
Crisil Balanced Fund Index 8.2 8.4 7.4 12.0 - 6.36 0.02 - -
Diversified Equity Funds
Quantum LT Equity (G) 15.3 28.3 21.4 26.9 23.1 8.58 0.13 85.4 14.6
UTI Master Value (G) 13.1 32.5 20.2 24.0 33.8 9.99 0.11 94.2 5.8
HDFC Top 200 (G) 13.5 22.1 19.5 31.9 135.0 8.95 0.12 94.5 5.5
Birla SL Frontline Equity (G) 10.7 16.7 15.2 30.2 88.6 8.82 0.08 93.1 6.9
DSPBR Top 100 Equity-Reg (G) 11.5 16.3 13.0 29.4 108.9 7.43 0.07 97.8 2.2
Category Average* 8.2 16.6 9.2 18.5 34.0 8.40 0.02 - -
BSE SENSEX 10.2 11.2 6.3 17.9 - 9.63 0.02 - -
(NAV data is as on June 7, 2011. Standard Deviation and Sharpe ratio is calculated over a 3-Yr period. Risk-free rate is assumed to be 6.37%)
*Note1: Category average has been calculated taking the "simple average", of the funds appearing above in the respective categories.
Note 2: % of equity and debt holdings for all the funds are as on May 31, 2011
(Source: ACE MF, PersonalFN Research)

The table above reveals that most balanced funds on the return front have performed quite well across time frames, thereby competing with the diversified equity funds. But a noteworthy point is, while performing competitively they have exposed their investors to lower risk (refer Standard Deviation column in the table above), and has thereby given enticing risk-adjusted returns almost similar to the diversified equity funds (refer Sharpe Ratio column in the table above).

While you may certainly argue on the return front saying - "diversified equity funds have performed better", but in our opinion one should not rule out the relatively higher risk which they have exposed its investors too. And, in that context balanced funds on the other hand have a dual ability of clocking impressive returns by keeping their volatility (i.e. risk) under check which makes them an attractive investment proposition for investors with low risk appetite.

Performance Across Market Cycles
Schemes / Index Bull Bear Bull
01-Aug-05 to 09-Jan-08 to 09-Mar-09 to
09-Jan-08 09-Mar-09 07-June-11
Balanced Funds
HDFC Prudence(G) 41.25 -45.26 54.41
Reliance Reg Savings-Balanced(G) 24.65 -41.04 46.50
Birla SL '95(G) 41.67 -43.72 42.69
Tata Balanced(G) 43.65 -44.84 40.19
UTI Balanced(G) 31.77 -42.34 35.46
Crisil Balanced Fund Index 32.25 -36.18 27.77
Diversified Equity Funds
Quantum LT Equity(G) - -47.30 56.12
UTI Master Value(G) 38.30 -58.30 63.92
HDFC Top 200(G) 52.80 -48.90 54.78
Birla SL Frontline Equity(G) 55.15 -50.04 47.44
DSPBR Top 100 Equity-Reg(G) 58.59 -45.19 39.89
BSE SENSEX 50.69 -55.36 43.94
(Source: ACE MF, PersonalFN Research)

Moreover, from the table above it is evident that during the down turn of the equity markets your wealth erosion is restrained in balanced funds due to set asset allocation model (generally 65% in equity and 35% in debt) followed by them. And this is unlike diversified equity funds where downside risk is greater since 80% - 100% or 90% -100% (of the fund's total assets) are generally maintained in equity.

Now one may say - "but on the upswing of the equity markets they perform better". Yes sure, but that's due to their very nature of asset allocation, which protects you against the downside and confines the performance on the return front when equity markets are in a bull phase.

HDFC Prudence vs. HDFC Top 200
Note: For the purpose of comparison only one fund from each category is taken. Base: Rs 10,000 (Source: ACE MF, PersonalFN Research)

The chart above too reveals that, when the equity markets were on their upswing prior to the emergence of sub-prime mortgage crisis, HDFC Top 200 (diversified equity fund) performed better (appreciated by 98% on an absolute basis) right from June 7, 2006 till January 18, 2008 (i.e. just before January 21, 2008 - the date on which news of sub-prime mortgage crisis emerged in the U.S.). But as the atrocities of the sub-prime mortgage unfolded, the equity markets went on a downswing, which led to diversified equity fund like HDFC Top 200 fund take a greater hit (fell by 48% on an absolute basis) than a balanced funds like HDFC Prudence Fund (which fell by 45%).

Moreover, if one had invested a sum of Rs 10,000 each, in the respective funds on June 7, 2006, and had stayed invested, you would yielded almost competing returns (HDFC Top 200 Fund Rs 25,976 and HDFC Prudence Fund Rs 25,289) as on June 7, 2011.

In a nutshell....

Hence, balanced funds are ideal investment avenue within mutual funds if you aren't ready to assume very high risk, but want to participate in the equity markets to add a zing to your return on investments.

Therefore, if you want your portfolio to deliver a stable performance over the long term, and also have a mix of equity and debt to follow an asset allocation of say 70:30 (70% into equity and 30% into debt) or say 65:35 (65% into equity and 35% into debt), you should consider allocating some portion of your investible amount to balanced funds in addition to diversified equity funds.

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.


The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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