We are in a market wherein every other day some or the other event on the domestic or global front creates panic. Over the past week, fund managers and investors have been losing sleep over the possibility of a bailout to Cyprus, a country which we would have only thought of as a tourist destination some months back. Today the discussion on Cyprus takes a lot of our time, while all the negativity on the domestic front, whether it is regarding inflation, slowdown in growth or even a vulnerable government, has been pushed to the back burner. To add to this, we have a central bank governor who is slashing rates in bits and pieces while sounding hawkish in all the bytes given in the public domain post policy announcements. In this scenario, most of our investors want to take shelter in balanced funds as they believe that an experienced fund manager will be able to allocate their money between equity and fixed income instruments. This will enable investors to go about their routine without taking too much of tension about how their surplus is faring had they made an independent decision. The intention of this column is to let investors know my thoughts on this category of funds and the weightage that they normally carry in our portfolios. Before getting into this exercise, let me give a brief gist on the balanced funds existing in the industry and the investment strategies that they follow.
Balanced funds are included in the hybrid category of funds whose investment strategy is to invest around 65% to 70% of the corpus into equities and the rest into fixed income securities. Currently, there are around 19 balanced funds in the industry with a total AUM of INR 11,454 crore as on February 2013. LIC Nomura MF Balanced Fund was the first fund launched in 1991 followed by Canara Robeco Balance Fund and HDFC Prudence Fund. As on the date of analysis, the first two schemes have garnered only INR 18 crore and INR 200 crore respectively, while HDFC Prudence Fund and HDFC Balanced Fund (launched in 2000) have a corpus of around INR 5,778 crore and INR 1,100 crore, respectively. A closer look at the data points reveals that most of these funds have more than 12 years of history yet have not been able to attract investor surplus of more than INR 500 crore. This is a clear indication that the industry as a whole has not been very upbeat about this category of funds. A detailed analysis of the portfolios of these 19 funds over the last 3 years shows that the average allocation into large-cap stocks has been to the tune of 54%. On the other hand, fund managers have been taking an exposure into various debt instruments depending upon their views on interest rates.
I have always been of the view that balanced funds are a good investment option for novice investors into mutual funds. Being first-time investors, they would not like to be exposed to the vagaries of the market and hence taking an exposure into a pure equity fund will only disappoint them if markets are in a jittery mood.
As a part of our asset allocation strategy, we have never included a balanced fund in our model portfolios. Our reasoning behind the same has been that if we can create an appropriate portfolio which has a good mix of equity and debt funds in tune with the risk profile of the investor then this portfolio should be able to outperform a good performing balanced fund in the long run. In pursuance of this I thought of putting together some numbers which will substantiate my views. We have been releasing a list of our recommended funds for some time now and if you get to glance at our recommended funds for the last 3 years, you would be able to see a few funds which have been there since the beginning of 2011.
Suppose an advisor /investor had created an aggressive portfolio with some of our favourite recommended funds and had allocated INR 1, 00,000 with a 70:30 bias into equity and debt. On the other hand, let’s assume the same amount being parked into the best performing balanced funds for the last three years. The comparative result is there for all to see. The performance would have been even more commendable if the advisor /investor had done rebalancing on a regular basis.
Table 1: A portfolio with Fundsupermart.com’s consistent winners
Table 2: Best Performing Balanced Funds
To conclude, I would advice investors to take control of their hard-earned money and allocate the same in an appropriate portfolio depending on their time horizon, investment goals, etc. However, if the investor feels the need for hand holding, then he should take the support of a financial advisor who is known to be profound in managing the surplus of investors.
iFAST and/or its content and research team’s licensed representatives may own or have positions in the mutual funds of any of the Asset Management Company mentioned or referred to in the article, and may from time to time add or dispose of, or be materially interested in any such. This article is not to be construed as an offer or solicitation for the subscription, purchase or sale of any mutual fund. No investment decision should be taken without first viewing a mutual fund's offer document/scheme additional information/scheme information document. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Investors should seek for professional investment, tax, and legal advice before making an investment or any other decision. Past performance and any forecast is not necessarily indicative of the future or likely performance of the mutual fund. The value of mutual funds and the income from them may fall as well as rise. Opinions expressed herein are subject to change without notice.