Sunday, February 2, 2014


BALANCED FUNDS Balanced funds are an interesting investment option for those who wish to avoid the hassle of direct equities, do not want too much stress and can save regularly. Balanced funds are generally not as balanced as the name indicates. For instance, if I see the portfolio of the scheme run by ICICI or HDFC, the investment is almost two thirds in equities and one third in debt instruments.

The main investment strategy for balanced funds would be to have a higher proportion in equities when equities are doing well and to reduce the proportion of equities when the equities are richly valued and not much upside is expected. However, for reasons of taxation, many mutual funds prefer or have opted for a strategy where the majority corpus is always weighted in favour of equities.

However, it is interesting to see how two large balanced funds have done over different time periods. I must say that I do not have any preference or bias for or against any fund and simply choosing them since they are popular names.

Measuring point to point returns, I get the following (annualised percentages):

6m 1yr 2yrs 3yrs 5yrs

ICICI Pru Balanced 12.2 6.3 14.2 11.0 18.9

HDFC Balanced 16.9 7.4 11.1 9.5 22.4

Sensex 6.0 3.1 9.2 3.8 16.8

With around two thirds of the money in equities, these funds have delivered far better returns than the benchmark equity index. This is simply by protecting part of the corpus in fixed income securities and by actively managing the equity allocation out of the total corpus.

These are point to point returns. Let us see how the same group has done under the SIP route, over one, three and five years:

1 year 3 years 5 years

ICICI Pru Balanced 22.7 14.8 14.1

HDFC Balanced 26.2 12.1 13.7

Kotak Sensex ETF 13.2 9.1 8.8

(returns are in annualised percentage per annum. ETF is a proxy for the BSE Sensex)

Again, the active fund managers have beaten the passive indices by a big margin even under the SIP route.

Balanced funds are generally ignored by most investors simply because most assume that it is only a matter of allocating funds between equities and debt. However, the window of flexibility in changing the allocation between the asset classes actively is what seems to have given the extra edge to balanced funds as opposed to plain equities. And one can clearly see that the returns seem to be far higher in the SIP route.

Another interesting thing is that the SIP route shows balanced funds to be at a huge advantage as opposed to the index. Typically, if we take the SIP route in equity funds as opposed to the equity indices, the difference would not be of this magnitude.

Many investors think Balanced Funds are inferior to Income funds. However, Income funds in India have not done well over the last decade, simply because of the interest rate movements that have been wild. Following were the Income fund category returns (annualised) ;

5 years- 6.64 %

3 years- 8.13%

1 year 5.24%

Thus, Income has even lagged liquid fund returns in India. Liquid funds delivered annualised returns of 7.3%; 8.88% and 8.94% over five, three and one year periods, respectively. Thus, I would totally avoid Income funds and look at Liquid funds and Balanced Funds provide excellent options in the mutual fund investment route. If I had invested through the SIP in Franklin India Bluechip Fund, I would have got annualised returns of 10.25%, 8.89% and 14.5% over 5, 3 and 1 year periods. Again, the Balanced fund options have done better.

Well one could argue that the Balanced Fund performance has been good because of smaller size relative to the good equity funds. For instance, a fund like HDFC Top 200 has a huge corpus and investing that money in to good ideas is a tough ask. And small investments, even if they have great returns, do not impact the overall scheme performance. Thus, size can become an enemy of performance. However, even in those large sizes, the SIP route has delivered better than the stock indices.

So, next time you are thinking of a SIP through the mutual fund route, I would recommend a decent allocation to the Balanced Funds.

February 1st, 2014


Naveen said...

Thanks for your analysis Bala. I agree with you regarding Balanced funds. Balanced funds do provide the best of both worlds of equity and debt. I have been doing a SIP in HDFC Prudence and have been happy with the returns.

NRK said...

Thank you Sir for taking time in sharing the knowledge.