Recently we profiled the monthly income plan (MIP) segment and highlighted how it can add significant value to investors' portfolios. Our intention was to focus on segments (other than diversified equity funds) which seem to have escaped investors' attention despite pitching in good performances. In this article we deal with the 'original' hybrid category - balanced funds.

Balanced funds powered by the presence of both equity and debt components are equipped to offer investors higher levels of diversification since they have exposure to two asset classes as compared to say an equity fund which invests only in stocks. This makes them an ideal investment proposition for investors who can't take on the risk associated with a diversified equity fund.

Top-performing balanced funds

					Asset Allocation
Balanced Funds	NAV (Rs)	6-Mth	1-Yr	3-Yr	Equity	Debt
MAGNUM BALANCED	20.95	24.41%	69.81%	49.40%	64.25%	35.75%
BOB BALANCED	19.42	25.05%	62.78%	-	67.68%	32.32%
KOTAK BALANCE	20.60	20.18%	57.46%	40.25%	63.71%	36.29%
HDFC PRUDENCE	73.88	20.10%	55.68%	48.58%	66.46%	33.54%
ING BALANCED	14.29	18.79%	52.02%	32.06%	57.57%	42.43%

(Source: Credence Analytics. NAV data as on August 31, 2005. Growth over 1-Yr is compounded annualised. Equity-debt allocations as on July 31, 2005)

Over the last 12 months, funds from the balanced funds segment have delivered impressive performances. Magnum Balanced (69.81%) emerges as the top performer; BOB Balanced (62.78%) and Kotak Balance (57.46%) occupy second and third positions respectively. Category leader HDFC Prudence (55.68%) also features in the list.

Balanced funds largely work on the premise of deriving growth from their equity component while the debt component imparts stability to the scheme; however an alternate structure cannot be ruled out. For example a conducive interest rate environment (read softening interest rates) coupled with a downturn in equity markets could result in the growth emanating from the debt component. Similarly in a scenario like the present one when interest rates are on the uptick but could stabilise, we might soon witness a situation when the debt component starts contributing to the returns as well.

It is this flexibility which gives balanced funds a unique edge over their diversified equity fund counterparts.
 

• Rank top-performing balanced funds.

  Although balanced funds are often perceived as avenues with a 60:40 equity-debt allocation, the segment has a number of variations to offer. For example, it is not uncommon to find aggressive offerings which invest upto 70% of their corpus in equities; similarly there are others which may not fully utilise their stated equity allocation limits. This diversity in offerings translates into a wide range of choices for investors. The key lies in selecting a fund which is best suited for your risk profile.

  Investors in balanced funds also stand to gain on account of the predetermined allocation between the equity and debt components. For example in a bull market like the present one, the fund manager in a well-managed balanced fund would ideally book profits from his equity investments and invest the same in the other asset class i.e. debt. This is done in order to restore the mandated equity-debt allocation that the bull run in equity markets might have disturbed. As a result, on one hand the gains made are captured in the scheme; conversely it might also provide an opportunity to invest in the other asset class (debt in this case) at an attractive price.

  At times balanced funds are criticised for being 'boring' investment avenues. This criticism can be traced to comparisons being drawn vis-à-vis diversified equity funds. Firstly, such a comparison is fundamentally flawed since an investment avenue which invests its entire corpus in equities (diversified equity funds) is being compared with one which only has a partial equity holding (balanced funds).

  Secondly, the comparison also rather unfairly overlooks balanced funds' ability to curtail investors' downside when equity markets lose steam. In a rising market like the present one, diversified equity funds will expectedly outperform balanced funds. However in case of a downturn, the 'boring' balanced fund is better equipped to keep investors' losses down. It is this dual ability to deliver on the returns parameter and yet keep the risk levels within check that makes balanced funds attractive investment propositions.

  Our advice to investors - don't restrict your options and look beyond the diversified equity funds segment. The mutual funds segment has a number of value-add propositions to offer and a balanced fund certainly qualifies as one!

   

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