FUND FLAVOUR
Balanced Funds
Smart start
The mandate of balanced funds is to invest in both debt and equities in a roughly equal proportion. So, obviously, their returns mirror the performance of these two asset classes. Over the past few months, equities have been sprightly, while debt has been lacklustre, with the net returns being worth savouring. A smart start for novices…
Out of the woods…
Balanced Funds
Smart start
The mandate of balanced funds is to invest in both debt and equities in a roughly equal proportion. So, obviously, their returns mirror the performance of these two asset classes. Over the past few months, equities have been sprightly, while debt has been lacklustre, with the net returns being worth savouring. A smart start for novices…
Out of the woods…
Over a one-year period, the set of 32 balanced funds, with a track record ranging from sixteen years to three years, has performed commendably. Most of them have bettered the Crisil Composite Bond Fund Index, a benchmark for balanced funds, often handsomely. The highest one-year return was posted by the evergreen HDFC Prudence at 84%, with the fund at the last rung of the ladder turning out a decent 24%. The average one-year return of the category of balanced funds was an impressive 57%, with as many as twenty funds having given a sumptuous return of 50% and above. Over the two-year period, though, the performance of balanced funds was more scattered, as they struggled to deal with the volatility in the stock market and the ripple effect of rising interest rates in the debt market. Balanced funds were constrained by the mandate of having to hold an average of 65 per cent in equities to qualify as equity funds. Hence, their ability to shield the fund returns with debt was limited and they faltered at the height of the global financial crisis.
Star schemes shine…
Scheme selection is of paramount importance, as is seen by a significant variance in performance across the set – a range as high as 60%. The most striking variance was the difference in performance of the two HDFC balanced funds. While HDFC Prudence, which HDFC got from the takeover of Zurich Mutual Fund in the late-nineties, was ranked number one, its home grown HDFC Balanced came in only fifth, with a marked difference of 11% in the one-year CAGR. Yes, scheme selection can make a sizeable difference to your returns.
Through the looking glass…
All asset classes have their own cycles, which at times run in opposite directions. Investing in more than one asset class, that too dissimilar and often moving in different directions, helps de-risk a portfolio. Such are the conditions in the debt and equity markets today that balanced funds make a case not just for conservative investors, but also for the opportunists. Indian equities might not deliver the runaway returns of the past five years (barring 2008), but they still hold immense promise in the long run. With the hardening of interest rates, the debt picture is not that rosy. Neither is it depressing. For the opportunists who want to ride the equity market as well as the appreciation from a drop in interest rates (in future), balanced funds are the option. Even for conservative investors, who do not want to take aggressive calls on asset allocation or stocks, balanced funds work out well. When it comes to asset allocation, balanced funds tend to be more disciplined than equity funds. In order to be classified as an equity-oriented fund (and be eligible for lower rates of capital gains tax and exemption from dividend distribution tax), a balanced fund has to invest at least 65 per cent of its corpus in equities. It tries to maintain that figure. It cannot go too low or else it would lose its preferential tax status. It cannot go too high without deviating from its mandate. This ensures a minimum equity allocation, as well as periodic profit booking in case of a bull run.
Simple investing techniques can deliver better results at much lower costs than the hard-to-understand financial products. As an investment category, balanced funds are simple and suited for cautious investors who seek the capital appreciation of equities, but only on the condition that they have some protection in the form of stable debt returns in case things do not pan out as planned. The underlying logic behind hybrids is that when stocks are sizzling, they can ride the trend. When stocks falter, hybrids can seek shelter in bonds. That profile, however, means making tradeoffs, namely, that the upside for a balanced fund during a bull run is less than an outright equity fund. Besides the investment opportunities, balanced funds present a unique diversification opportunity. Find your balance, but zero in on the right balanced funds.
Scheme selection is of paramount importance, as is seen by a significant variance in performance across the set – a range as high as 60%. The most striking variance was the difference in performance of the two HDFC balanced funds. While HDFC Prudence, which HDFC got from the takeover of Zurich Mutual Fund in the late-nineties, was ranked number one, its home grown HDFC Balanced came in only fifth, with a marked difference of 11% in the one-year CAGR. Yes, scheme selection can make a sizeable difference to your returns.
Through the looking glass…
All asset classes have their own cycles, which at times run in opposite directions. Investing in more than one asset class, that too dissimilar and often moving in different directions, helps de-risk a portfolio. Such are the conditions in the debt and equity markets today that balanced funds make a case not just for conservative investors, but also for the opportunists. Indian equities might not deliver the runaway returns of the past five years (barring 2008), but they still hold immense promise in the long run. With the hardening of interest rates, the debt picture is not that rosy. Neither is it depressing. For the opportunists who want to ride the equity market as well as the appreciation from a drop in interest rates (in future), balanced funds are the option. Even for conservative investors, who do not want to take aggressive calls on asset allocation or stocks, balanced funds work out well. When it comes to asset allocation, balanced funds tend to be more disciplined than equity funds. In order to be classified as an equity-oriented fund (and be eligible for lower rates of capital gains tax and exemption from dividend distribution tax), a balanced fund has to invest at least 65 per cent of its corpus in equities. It tries to maintain that figure. It cannot go too low or else it would lose its preferential tax status. It cannot go too high without deviating from its mandate. This ensures a minimum equity allocation, as well as periodic profit booking in case of a bull run.
Simple investing techniques can deliver better results at much lower costs than the hard-to-understand financial products. As an investment category, balanced funds are simple and suited for cautious investors who seek the capital appreciation of equities, but only on the condition that they have some protection in the form of stable debt returns in case things do not pan out as planned. The underlying logic behind hybrids is that when stocks are sizzling, they can ride the trend. When stocks falter, hybrids can seek shelter in bonds. That profile, however, means making tradeoffs, namely, that the upside for a balanced fund during a bull run is less than an outright equity fund. Besides the investment opportunities, balanced funds present a unique diversification opportunity. Find your balance, but zero in on the right balanced funds.
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