Gem Gaze ..Lulled by the lustre?

Gem Gaze

Lulled by the lustre?

Over longer time frames, asset allocation can help you protect your portfolios on the downside and create wealth as well. Powered by investments in both equity and debt, balanced funds qualify as effective asset allocation tools. The debt component in balanced funds can insulate your portfolio from the volatility in the equity markets. The two steep market declines in the recent past (the ones in May 2006 and February 2007) demonstrate how valuable this debt allocation can be to preserve returns. But the Rs.10357.9 crore AUM of the 24 Balanced mutual funds in India, a paltry 5.29 % of the total industry size, is a sad reminder of their relegation to the less prominent pages of the media while equity funds grabbed the headlines riding high on the euphoria created by the meteoric rise in equities.

Your portfolio studded with these gems will strike the right chord and balance and reinstate the lost lustre.

HDFC Prudence Fund

It races like an equity fund but with utmost stability. This is what makes the fund stand out as safe and sure. HDFC Prudence Fund, formerly known as Zurich India Prudence Fund was the first balanced fund to be launched in India in February 1994. This pioneer and trendsetter has built an impressive track record with its consistent long-term performance, ably aided by the process-driven investment approach followed at HDFC Mutual Fund. A measure of its popularity is the fact that it is the only balanced fund with net assets exceeding Rs 1,000 crores. Its stock picks embrace large caps as well as mid caps and are not churned heavily. In terms of sectoral allocation, it pursues a concentrated investment strategy. Owing to a rising corpus (increase of 100 per cent since January 2006) combined with a mid-cap orientation, the count of stocks has increased from 30-35 (early 2006), to as many as 50 scrips. This has been accompanied by a steady decline in the concentration of holdings. Typically, it invests between 70%-75% of its assets in equities and equity-related instruments and the balance (25%-30%) is held in debt and money market instruments. It beats the category average despite being amongst the least volatile since it does not chase momentum stocks and buys stocks with good businesses with at least a two-year view. The fund manages its debt portion passively and prefers to hold securities with shorter maturities and hold them till maturity. The judicious use of the debt component enabled it to cut losses just before the tech crash.

FT India Balanced

This is one fund that will not give you sleepless nights. You may not get extraordinary returns here, but the fund's consistency since its launch in December 1999 and 15% annualised returns since launch make it a classic balanced fund. A glance at the fund's equity portfolio gives a different impression. Between 60% to 70% of total investments are in equity. This appears aggressive. But large caps constitute a major portion of the portfolio. The fund's exposure of 38 per cent in debt as of March 2007 reflects its optimism over the return potential in this space. The fund has gone for shorter maturity periods of its debt component with higher yield to maturity on the back of successive interest rate hikes. But over its tenure, the fund's track record has been inspiring. Cautious investors would like this portfolio.

Magnum Balanced Fund

This category beating performer is the conservative investor’s cup of tea. Launched in December 1995, Magnum Balanced Fund, has over the past year retained its equity allocations at broadly 65-85 per cent of its assets. The fund invests one-third of its equity portfolio in mid- and small-cap stocks and the rest in large-cap stocks. The portfolio is well-spread-out across sectors. IT continued to be the preferred sector, along with energy and industrial manufacturing. The top 10 stocks account for 32 per cent of the assets. In the latest portfolio, debt and money market instruments cornered 33 per cent. Taking advantage of the higher yields and spreads on corporate debt, the fund has invested close to 12 per cent of its assets in non-convertible debentures, with the rest in shorter-term debt.

Tata Balanced

Astute and agile stock picking and exposure to the right sectors at the right time makes Tata Balanced a worthwhile inclusion in your portfolio. This year, this outperformer has found itself near the head of the pack. A combination of low exposure to auto stocks, holdings in financial services and its long-term strategy in the basic-engineering, metals and energy space paid off. In the technology space, losses were minimised by astute stock picking and leveraging on smaller companies. By and large, the fund plays it safe and does not make any adventurous moves. This was not the case earlier though. Last year, when the market corrected, it got badly hit and lost 25 per cent in a single month (May 12-June 13, 2006). The outcome was a swift move to large caps from a dominant mid-cap portfolio. This was a well timed lesson because large caps began to rally soon after. Over the past one year, it has been doing well and frequently outperforms the average.

Sundaram Balanced

Resolutely shunning all adventurism, Sundaram Balanced is well-disciplined and has stuck to the basic formula for a well-run balanced fund - consistent asset allocation; a well-diversified equity portfolio where stocks stay for the long haul; and in debt, the risk of high-yield bonds tempered by a low exposure to gilts. While the fund does fine-tune its portfolio to be a part of various sector-led rallies from time to time, its aversion to being overweight on any particular sector means that its gains-and risk-from such moves will be considerably less than its more aggressive peers. The debt portfolio has seen a shift towards quality, as the allocation to high yielding but below AAA rated bonds has come down. The fund seems to know its priorities well and is well poised to be a core holding for investors seeking protection from bear markets.