Seeking the right balance

If you look at the performance of equity-oriented balanced funds for the past one year, the results are surprising. The returns vary between 25.76 per cent and 105.11 per cent. Choosing right from among the 33 existing schemes is a tough call.

The disparity is due to higher equity allocations. Though they are called balanced funds, most invest 65-80 per cent of their corpus in equity. “This is as good as a diversified equity scheme,” says Gaurav Mashruwala, a certified financial planner.

This is perhaps one reason financial planners rarely use balanced funds (equity-oriented) while planning their clients’ investments. Most of them prefer separate equity and debt funds, though such an arrangement is not as tax efficient as a balanced fund (equity-oriented).

Conventionally, balanced funds were for investors who were not comfortable with equity-related volatility. However, a scheme that invests 65 per cent of its assets in stocks is classified as an equity scheme. Consequently, it is more tax efficient.

“The variation in returns is due to higher exposure to stocks. Once allocation to equity increases, returns depend on fund managers’ calls,” says Malhar Majumder, a certified financial planner.

This is evident if you look at one-year returns. Among the top three schemes by returns, HDFC Prudence has given returns of 105.11 per cent, followed by Reliance Regular Savings Balanced (96.25 per cent) and HDFC Balanced (84.12 per cent). On the other side of the spectrum are Birla Sun Life Freedom (25.76 per cent), LICMF ULIS (29.56 per cent) and LICMF Balanced (35.79 per cent).

The benchmark for this fund is a customised index, Crisil Balanced Fund Index. It tracks the performance of other indices – Nifty (65 per cent allocation) and Crisil Composite Bond Fund (35 per cent allocation).

Financial planners say due to this, they usually ask clients to create their own balanced funds. They invest one portion, say 60 per cent, in equity diversified funds and the remaining in debt schemes. Such investments are easy to follow and evaluate against benchmarks.

“Only investors who think that it is tedious to maintain this asset allocation can look for balanced funds that automatically take care of this task,” says Majumder.

The allocation that balanced funds maintain is more apt for the middle-aged (40-45 years).

Ranen Gandhi, head, product, ICICI Prudential, says these funds also suit investors those who are graduating from minimal equity exposure to allocating more to stocks. “They will find equity diversified funds more volatile. Debt adds stability to balanced funds. In case of a correction, they fall less than pure equity funds,” says Gandhi. Diversified equity funds invest as much as 90-95 per cent in shares.

If you are going for balanced funds, long-term returns (over three-five years) are the first things you should look at. Also, remember to check the asset allocation of the fund over the past one year. Opt for a fund that has a stable asset allocation and keeps a minimum of 25 per cent in debt. This shows that your fund manager does not go overboard when markets are bullish.