If you depend on the marketing efforts of asset management companies (AMCs) and distributors to get to know about mutual funds, chances are you have no money in balanced funds. Just take a look at the record of new fund launches. Since the stock market started rising in 2003, 12 new equity-oriented balanced funds have been launched, as against 157 new equity funds during the same period. That's 13 equity funds for every balanced fund.
Balanced funds (also called hybrid funds) maintain a balance between equity and fixed income. The fixed income part is generally corporate or government debt of various types. This simple structure is more conservative in returns than equity funds, but it compensates with some great advantages.
To maintain the ratio, the fund manager has to periodically sell whichever investment has done better. With the proceeds of the sale, he has to buy the other type of investment to regain the balance. While this sounds counter-intuitive to the average investor, it ensures that the profits from equity are being regularly realised and protected by investing them in safe debt investments. Over a complete rise-and-fall market cycle, this invariably produces decent returns with far less volatility and heartburn.
Over the last five years, the average equity diversified has given returns of about 12.26 per cent per annum and the average equity-oriented balanced fund has produced 10.16 per cent, but with lower volatility.
Not only does this balanced strategy get stable returns, it is also more tax-efficient for a fund to implement it. If a balanced fund keeps its equity allocation above 65 per cent, then the investor's entire investment is treated as equity for tax purposes and thus becomes free from long-term capital gains tax.
Here are few options investors can look at:
CANARA ROBECO BALANCE
This fund has a long and complicated history. It is the product of three balanced funds of two asset management companies - Canbank Mutual Fund (now Canara Robeco) and GIC Mutual Fund. In 2008, the fund was merged with Canara Robeco Balance II and the final entity has been named Canara Robeco Balanced.
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Due to the lack of continuity in management, it's tough to nail down its style. Also, since December 2007, there have been three fund manager changes with the current one taking over in July 2008. Since this period (July 2008), there has been a significant decline in large-caps and the equity allocation has also begun to dip. On the debt side, the fund is dabbling more in long-term paper probably expecting interest rates to fall.
Over the past 14 years, the fund has outperformed the category average nine times. Its performance in 2007 was just about average but it has been holding its own in the downturn in 2008. It's worth a look.
DSP BLACKROCK BALANCED
After long years of being an average performer, this fund has finally become a head-turner in recent times. Here's the evidence. In the last bull run (June 15, 2006 - January 8, 2008), the fund managed a top quartile performance with an absolute return of 55.85 per cent. And in the bearish phase that immediately followed, it has managed to slump less than the category average.
This is a fund that plays it safe. By and large, it sticks to its mandated equity allocation. Despite a tilt towards smaller cap stocks, it stays well balanced across sectors and casts its lot with defensives.
On the debt side, the fund employs all available debt instruments. Unlike its peers, it has refrained from extensively investing in debenture and commercial paper. Rather, it invests in a suitable combination of floating rate papers of all kinds and government bonds. You will be well taken care of here if you don't expect trail blazing returns.
MAGNUM BALANCED
This fund may have toned down some its brashness but it's still more aggressive than the normal balanced fund. In its first seven years, it failed to impress. Barring 1999, which left everyone speechless when it delivered 192.51 per cent, which was 100 per cent higher than the category average! The year 2003 saw a change in the fund. Since then, it has consistently outperformed the category average over five years.
The fund's mandate gives it the leeway to go headlong into equity. But the fund has never done so. In fact, its highest exposure has been at around 77 per cent. But within the equity allocation it can get quite aggressive and has the mark of a risk taker. It dabbles in stocks that other fund managers prefer to stay away. For instance its real estate exposure in Nagarjuna Constructions, Akruti City, Unitech, IVRCL Infra, and Puravankara Projects.
On the debt side, the fund sticks to high quality paper and prefers debentures and certificate of deposits of banks and financial institutions.
