GEMGAZE

January 2015

An ideal bet for first-time investors

Retail investors are usually the last ones to join the equity party. Those keen to jump in now may find, to their dismay, that the market has run up a bit too much for their liking. Balanced funds, however, may be a good option for them, especially first-time investors. Equity-oriented balanced funds typically invest 65% or more of their corpus into equities and the rest is invested in fixed income instruments. The downside protection in a balanced fund is higher than a pure equity fund, which makes it ideal for first-time equity investors.

All the GEMs from the 2014 GEMGAZE, save Sundaram Balanced Fund, have performed reasonably well in the past one year and figure prominently in the 2015 GEMGAZE too. ICICI Prudential Balanced Fund and Tata Balanced Fund, which have been showing creditable performance over the past few years, have been accorded a red carpet welcome.

HDFC Prudence Fund Gem

The top performer, by a wide margin, HDFC Prudence Fund, is also the largest fund in the category with assets amounting to Rs 8,081 crore. HDFC Prudence, with its long-standing track record of delivering 21.5% compounded annually over the last 10 years, towers over the performance of its benchmark of 12.8% annually over the same period. Over a three- and five-year period horizon, the fund returned an annualised 15.8% and 11.2%, respectively. Its benchmark, CRISIL Balanced Fund Index, returned 6.2% and 6%, respectively, over the same period. The return of 53.87% in the past one year as against the category average of 42.05% is heartening. The fund not only outperformed its benchmark but also delivered returns comparable with top diversified equity funds. HDFC Prudence Fund has a diversified quality portfolio with a blend of growth and value and maintains over 70% (73.7% at present) equity allocation before rebalancing. The allocation to a single stock has been capped at around 7%, with the highest currently allocated to State Bank of India. There are 76 stocks in the portfolio and the top three sectors are finance, technology, and engineering, which constitute 37.61% of the portfolio. The fund has higher exposure to mid and small-cap stocks compared with peers. The fund also takes an aggressive stance when it comes to holding debt. Even as early as last year, it held 15% in long-term government securities. While this did cause volatility, it paid off this year. This debt strategy is also one of the reasons for the fund’s overall superior performance in the last one year. The fund is managed by Prashant Jain. A consistent outperformer, the portfolio turnover is 34% and it has the lowest expense ratio of 2.29% in the category, making it a compelling pick.

ICICI Prudential Balanced Fund  Gem

ICICI Prudential Balanced Fund has earned a return of 47.48% over the past one year as against the category average of 42.05%. The three-year and five-year returns are also more than the category average of 22.65% and 12.64% respectively at 27.52% and 17.54%. The fund's superior performance can be attributed to three factors - extra conservatism in stock selection, avoiding any sector skew, and a bottom-up stock selection strategy. The fund has 69.45% of its portfolio invested in equity comprising 48 stocks. The debt component of ICICI Prudential Balanced Fund comprises mainly of bonds and debentures. This relatively higher preference for debt, together with a diffused allocation to stocks and sectors lowers the risk-profile of the fund. That its equity holdings are mainly in large-cap stocks, adds to the fund’s stability. ICICI Prudential Balanced Fund manages debt portion quite actively to ensure higher yields from its holdings. This Rs 1352 crore fund has 35% of the portfolio in the top three sectors, financial services, automobile, and engineering. The expense ratio of the fund is 2.59% while the portfolio turnover ratio is 52%. The fund is benchmarked against CRISIL Balanced Index.

Tata Balanced Fund   Gem

The tightrope walk between safety and returns that a balanced fund has to perform is not straightforward, but Tata Balanced has consistently done this better than most of its peers. This fund has handsomely outperformed the benchmark as well as the category over the last ten years. Ten year returns have been 16.7%. This compares very well with the category average of 13.5% and the benchmark's return of 10.7%. In terms of portfolio construction, equity comprises 74.07% of the portfolio mix, while fixed income securities comprises the rest. The fund has a predominantly large cap bias with a high growth focus. It is very well diversified with its top 5 holdings, Govt Bonds of 2019 and 2020 maturities, HCL, TCS, and United Spirits accounting for less than 19% of the total portfolio value. The quality of its debt portfolio is also quite high with limited interest rate sensitivity. The one-year return of this Rs 1785 crore fund is 50.74% as against the category average of 42.77%. Returns of 27.19% and 16.07% respectively, as against the category average of 22.23% and 12.79% during a three- and five-year period, reflects the fund's ability in stock selection. 41% of the portfolio is in the top three sectors, finance, construction, and engineering. The fund has 65 stocks in the portfolio, and has in recent times been more aggressive in churning its portfolio with a portfolio turnover ratio of 179%. The fund has a unique option that may help even relatively conservative investors looking for regular payouts. The fund has a monthly dividend payout option. Started in August 2010, this option has been paying dividends every single month since it was launched, although the quantum of dividends varied based on market conditions. Hence, for a retired investor with investments diversified across other fixed income products, this fund could be a good option to take exposure to the equity class. The expense ratio is 2.57%. The fund is managed by Mr Raghupathi Acharya since October 2013.

Reliance Regular Savings Equity Fund   Gem

Reliance Regular Savings Equity Fund is an equity-oriented balanced fund with 74.06% in equity and has managed to beat its benchmark – Crisil Balanced — over one-, three- and five-year timeframes. The one-year return of this Rs 915 crore fund is 48.12% as against the category average of 42.77%. Returns of 24.81% and 14.62% respectively, as against the category average of 22.23% and 12.79% during a three- and five-year period, reflects the fund's ability in stock selection. 41% of the portfolio is in the top three sectors, finance, automobile, and technology. The fund has a very compact portfolio of 32 stocks, and has in recent times been more aggressive in churning its portfolio with a portfolio turnover ratio of 82%. The expense ratio is 2.85%. The fund is managed by Mr Sanjay Parekh since April 2012.

Canara Robeco Balanced Fund Gem

Canara Robeco Balanced Fund is the oldest balanced fund that is still around. It registers substantial gains when the equity markets are doing well, and limits losses when the markets fall. Its recovery after the global financial crisis of 2008-09 is the perfect example. Canara Robeco Balanced Fund puts in around 70% of its portfolio into equities, with the remaining in debt. In both components, the fund follows a relatively safe strategy. Its current portfolio consists mostly of bluechips, which can serve it well if the markets take a breather now, with mid- and small-cap stocks having already galloped. In its debt component, Canara Robeco Balanced usually invests in medium-term corporate debt, short-term CBLO market, and certificate of deposits. Investments are made in AA or AAA-rated debt, adding another layer of safety. It has recently moved into longer-term debt, which may pay off as the interest rate cycle turns down. The one-year return of the fund is 48.16% as against the category average of 42.05%. The fund’s five-year return of 15.4% is higher than the category average of 13.2%. 38% of the portfolio is in the top three sectors, concentrated in finance, construction, and energy sectors. To be sure, in many of these years it has beaten the benchmark by only a small margin, but that is characteristic of a conservative fund. Unlike a peer which will have a big lead in six years and a lag in four, this fund will take a slow and steady approach. Surely, there are many investors who prefer the tortoise to the hare. All things considered, here is a conservatively run fund that will deliver mild positive surprises and almost no negative ones. The expense ratio of this Rs 286 crore fund is 2.8% with a portfolio turnover ratio of 69%. The fund is managed by Mr Krishna Sanghvi since September 2012.