If you are an investor seeking good returns with little tension of market volatility and the associated risks, balanced funds are what the doctor will order. Shorn of jargon, balanced funds are mixed or hybrid investment schemes that bridge the gap between the riskier equity market and the relatively safer debt market.
Depending on the nature and aim of investment, as well as the disposition of the investor, balanced funds can come in different shades in between the two extremes. Equity hybrid schemes, for instance, invest more in equities than debt. Debt hybrid funds, on the other hand, invest a minimum 75 per cent of the funds in debt, and the remaining in equity.
A look at the performance of equity-oriented balanced funds shows their superior, risk-adjusted returns over one-, three- and five-year periods. Over a one-year period through May 11, the balanced funds delivered an average 31 per cent returns compared with 20 per cent by the Sensex and 26 per cent by diversified large-cap equity funds. This superior performance of balanced funds is largely due to the buoyant stock markets as well as debt markets, owing to rate cuts, says Nirmal Rewaria, Business Head, Edelweiss Financial Planning.
Over the last five years, the top performing balanced funds - HDFC Children's Gift Fund and HDFC Balanced Fund - returned 18 and 17.4 per cent, respectively. That is head and shoulders above the 11 per cent average returns in the large-cap equity diversified funds category. One of the longest standing balanced funds, the Birla Sun Life 95 Fund, which was launched in 1995, returned 18 per cent interest over a 10-year period, compounded annually as of May 11, 2015. Over the past year, the fund has maintained an aggressive mix of 73 per cent equity and 27 per cent debt allocation. On the equity side, high exposure to cyclical sectors such as banking and financial services, auto and retail have helped the fund.
The Franklin India Balanced Fund has also done exceedingly well, returning 38 per cent in the last one year, 23 per cent CAGR (compound annual growth rate) over a three-year period and 15 per cent CAGR over five years, beating both the category average and the Sensex. "Overall, the mix of growth/value exposures and avoiding overheated stocks has helped the fund deliver a superior, risk-adjusted performance over the long term," says Anand Radhakrishnan, CIO, Franklin Equity, Franklin Templeton Investments India. The ICICI Prudential Balanced fund has returned 32 per cent in the one-year and 17 per cent CAGR in the five-year period. According to S. Naren, CIO, ICICI Prudential Asset Management Company, a strong mid-cap bottom-up picking and allocation to right sectors boosted returns. ICICI Prudential Child Care Gift Plan also features among the top performers over a five-year period, returning 12 per cent CAGR.
THE DEBT EDGE
Besides benefiting from a rise in stock prices, the debt portion of their portfolio also benefited from a favourable movement in interest rates. Debt and the more risk-averse gilt mutual funds - they invest in corporate bonds and government securities, respectively - returned 12 to 15 per cent in the last one year."In certain cases, balanced funds that had increased exposure to long-term gilt securities benefited from the falling interest rates. This resulted in superior returns compared to large-cap equity funds," says Naren.
Falling interest rates and yields are good news for bond investors, as interest rates and bond prices share an inverse relationship - a fall in rate and yield leads to appreciation in bond prices. In this environment, balanced funds were best positioned to capture these improving sentiments in both equity and debt markets. Since 65 to 75 per cent of their funds are invested in the equity markets, with the remaining going into buying debt products, they score better than the riskier large-cap equity funds, which invest up to 100 per cent in stocks.
Contrary to popular belief, most balanced funds portfolios are managed both on the equity and debt side. On the equity side, they are managed on market valuations and across market capitalisation. The debt portion is actively managed using a blend of duration and accrual strategies. "The portfolio is constructed keeping in mind the conservative risk profile of investors. So we do not take any aggressive calls and tend to avoid companies with high valuations," says Naren.
SHOULD YOU INVEST?
Balanced funds are tailored for first-time investors and those looking for relative stability for their savings, rather than those eyeing pure equity exposure and high-risk capital accumulation. How much of balanced funds should you have in your investment portfolio? Rewaria advises a good 20 to 25 per cent.
Choosing the right fund is imperative. Funds should not be solely considered on their historical returns. While quantitative factors such as returns are important, investors also need to consider the qualitative aspect that do not directly reflect in the returns. Since there are two assets in one fund, Rewaria analyses both parts on different parameters. For equity, he considers the fund house, the fund manager, asset quality, stability of portfolio, diversification, risk taken by the fund, asset size and historical returns, among others. The age of the fund is another factor. Rewaria says go for funds that have been around for at least five years and have seen different market cycles. For the debt part, an investor should look at asset quality, fund manager and sensitivity of the fund to any interest rate changes.