GEM GAZE
January 2010

Balanced Funds Bouquet

Balanced funds are a great way to invest in mutual funds. They offer the most convenient solution to balance out stability and growth. Time and again, they have proved that they can be your best friend during tough times. Around 60-75% allocation to equities means your money would grow at a healthy pace, while the debt portion would ensure that you reach your goal safely. They are the best hope for those who want to benefit from equities but do not have the stomach for volatility. What makes balanced funds a wonderful investment proposition is their structure which works in your interest in more than one way. Firstly, around 25-40% debt allocation ensures that you are never taking undue risks by going overboard with equities. Secondly, regular re-balancing enables profit-booking as and when the equity markets go up. This means that the gains are realised and transferred to safer debt instruments regularly. Therefore, the message is clear - cushion on the downside, but a little compromise on returns. The performance of balanced funds, at least the good ones, bears testimony to that.

Notwithstanding the turbulent market till the first quarter of 2009, the bouquet of balanced GEMS of 2009 has retained its esteemed status in 2010.

HDFC Prudence Fund
Setting standards

HDFC Prudence Fund ranks among the leading balanced funds in the country. Powered by an impressive track record across the risk and return parameters, the fund has often set the tone for its peers from the balanced funds segment. Its humungous asset size of over Rs 3,370 crore also makes this oldest equity-oriented hybrid fund the largest and the most popular scheme in the category. Despite being benchmarked to Crisil Balanced index, the fund's performance, so far, has inevitably raised its benchmark to an equity index like the Sensex or the Nifty. HDFC Prudence has been successful in beating these indices uniformly year-on-year, since its launch, except in the most bullish years of 2006 & 2007. During the downturn of 2008, despite outperforming the Sensex and the Nifty, the fund fell by about 42% in '08 against the average decline of about 41% by the category of balanced funds. But what really surprises is the fund's strong comeback in the calendar year 2009. Since January 2009, the fund has delivered 82% returns, which is as good as the average of the category of diversified equity schemes. With about 75% of its assets invested in equity, the fund is extremely well-diversified and on average holds 55-60 stocks in the portfolio. The stock choices in the equity portfolio have tended to be unconventional, with a distinct mid-cap bias. Some of its recent acquisitions have turned out to be multi-baggers. Over the last couple of years, concentration to individual stocks has been reduced. From a 36 per cent exposure (of overall portfolio) to its top 10 stocks, the fund’s recent portfolios have 26-27 per cent invested in its top stocks. In terms of sectoral composition, financial services and pharmaceuticals have been dominating the fund's portfolio since 2008. As far as the fund's debt compositions are concerned, the fund mostly invests in high rated papers especially those with AA+ or AAA ratings and in sovereign papers. The consistent showing delivered by the fund can in no small measure be attributed to the process-driven investment approach followed at HDFC Mutual Fund and the efficient fund management team led by Prashant Jain.

Franklin Templeton India Balanced Fund
Mature moves

With an AUM of Rs 305 crores, the one-year return of the fund was 53%. However, the fund's annualised returns over the past five years of 12 per cent have been better than the category average of 10.47 per cent. This manifests the fact that the fund is a consistent performer and ideal for a smooth long ride. In its entire history spanning nearly a decade, the fund has never delivered less than its category. This consistent performer's loss in the market downturn has been less than that of its category, by four per cent. While the large-cap bias helped the fund in remaining afloat through the crisis, the same bias had limited its returns in the bull run of 2007. The large cap exposure in December 2009 was around 84%. The fund follows a disciplined approach for its asset allocation. Its equity allocation has averaged 65 per cent since inception. As far as the sectoral allocation is concerned, financial services has always been among the favourite sectors of the fund. Other favourite sectors of the fund are engineering and diversified. The portfolio of the fund looks fairly diversified with around 38 stocks. Furthermore, allocation to a single stock is rarely seen exceeding seven per cent in the recent years. On the debt side, a large portion (around 16 per cent at present) of the fund's portfolio is invested into debentures. Among the debt instruments as well, financial services is the favourite sector of the fund with an average allocation of 11.31 per cent since inception to nearly 10% at present. The fund manager has recently been increasing the allocation to debentures of the energy sector. From less than one per cent allocation in November 2008, it has increased to 11.5 per cent in December 2009. Overall, diversified portfolio with a large-cap tilt makes the fund suitable for tiding over the rough weather as well as earning consistent long-term returns.

Magnum Balanced Fund
Changing chances

Magnum Balanced had a chequered track record and hit a rough patch in 2008. But, going by its 5-year annualised return of 26 per cent, this Rs 501 crore fund still has a lot going for it. This fund has left behind its days of brashness to evolve into a stable offering. Despite a mandate allowing it to go headlong into equity, the fund has never done so. In fact, its highest exposure has been at around 79%. It hovers at around 74.6% at present. Currently, the fund looks fairly diversified with the top three sectors accounting for nearly 31%, in line with its category. The number of stocks, which at times has been around 25, has averaged at around 47 in the past year. On the debt side, the fund sticks to high quality paper and prefers debentures and certificate of deposits of banks and financial institutions. The fund maintains a broad portfolio that has averaged at 47 stocks, where no single stock allocation has crossed 5 per cent with the exception of Reliance Industries. Finance, energy and engineering stocks constitute a third of the portfolio. On the debt side, the fund maintains a high quality portfolio with a preference for Certificates of Deposit (CD), Commercial Paper (CP) and non-convertible debentures. That is because the debt portion of the portfolio is usually maintained on shorter duration to generate regular income, and thus held to maturity. But, often during periods of volatile or higher yields, the duration is hiked - by investing mainly in G-Secs - and trade for profits.

Sundaram Balanced Fund
Cautious calls

Sundaram Balanced Fund understands the tenets of balanced funds. The fund has not only earned decent returns for its investors, but protected them through the ups and downs of the markets. The balanced nature of the fund is reflected in the way it has tackled market rallies. While it has responded well to all of them, it has maintained equilibrium, unlike some of its peers. The AUM of the fund rose from a mere Rs 46 crore in November 2009 to Rs 176 crore in December 2009 – a massive jump in a short period. The fund managers intend to pursue asset allocation strategies in the forthcoming periods and would be largely initiating trading strategies in Government of India securities. Caution is obvious in the way the fund is managing its debt portfolio. The equity component has fallen to as low as 21% and will be stepped up to deploy the inflows. The preferred sectors are financial services, metals, and engineering, with an emphasis on large caps. 78% of the stocks are large caps. There were a total of 18 stocks as on 31 December, 2009.

DSP BlackRock Balanced Fund

Safely steadfast

You will not find this fund topping the charts, but neither will you find it at the bottom of the ladder. This one does what a balanced fund is supposed to do - play it safe. And therein lies its appeal. The fund sticks to its equity mandate of 65-75 per cent, with its equity allocation hovering at around 74% at present. It upholds its large cap bias, which stands at 45% at present, but is not averse to smaller stocks. Since January 2008, its top five stocks hardly accounted for around 15% (13% in December 2009) of the total corpus whereas the category average was almost 24%. It stays well-balanced across sectors and casts its lot with defensives. While healthcare and consumer non-durables are prominent, infotech has always been its favourite. On the debt side, unlike its peers, it has refrained from extensively investing in debenture and commercial paper. Rather, it invests in floating rate papers of all kinds and government bonds. This way, it is protected on the credit as well as interest rate side.