Wary of buying shares but don't want to miss out on the bull run? Then you should consider a balanced fund with an equity tilt.
Balanced funds invest in equity (shares) and debt (fixed income instruments). Usually, they put around 50% of their total investments in debt and 50% in equity.
However, the funds discussed here are more equity oriented with more than 50% of their investments going into equity. So you do get the benefit of the bull run as well as some stability with the debt part of the portfolio.
Here are three balanced funds that deserve a good look.
Comparing the players
On an average, the category of balanced funds has delivered the following returns.
1-year return: 42.05%
3-year return: 40.29%
5-year return: 19.97%
So when you look at the returns of individual funds, compare it with the category average mentioned above.
The funds are also given a star rating. The funds with a 5-star rating are the best. Those with a 1-star rating are the worst.
However, "best" does not indicate the highest return when compared with the rest. It means you will get a good return without putting your money at too much risk.
Basically, it is a quick and easy way to identify mutual funds that have produced strong risk-adjusted performances vis-a-vis their peers.
All the returns and the Net Asset Values are as of October 3, 2005.
The returns and NAV mentioned are for the growth scheme of the fund, not dividend. To understand the difference between growth and dividend schemes, read The best mutual fund scheme for you.
Prudential ICICI Balanced
Launch: October 1999
NAV: 25.16
1-year return: 47.74%
3-year returns: 42.80%
5-year returns: 21.23%
Rating: 3 stars
Performance record
This fund has beaten the average category returns of one year, three years and five years.
Like most funds launched at the peak of the tech bubble, it had its shares of difficulties. During the tech bubble, the fund delivered a return of 68% in five months only to end with a 45% loss by the end of 2000.
Since then, it began to spread its assets across various sectors.
Investments
In recent times, it has reduced investments in energy and metal stocks, while beefing up investments in auto, chemical and basic engineering stocks.
The high amount of investment in auto, healthcare and metal stocks has slowed down the fund's growth in the recent times. However, some good picks in engineering, construction, services and consumer non-durable sectors have more than compensated for it.
In terms of market capitalisation, the fund has started to invest heavily in riskier mid- and small-cap stocks. In the first eight months of 2005, its allocation to these stocks was around 46%.
But, it has invested in a greater number of stocks which brings down the risk. The total number of stocks was around 20 to 25 last year and this year, around 35 to 40.
On the debt side, as interest rates moved upwards, the fund decreased its debt allocation. July end, investments in debt were just 12.61% of the total portfolio.
What to expect
Overall, Prudential ICICI Balanced doesn't take an aggressive stance on either of the two asset classes. Consequently, conservative investors will find this fund's style to their liking.
Though you cannot expect miracles with this fund, it will take you to your goal in a stable fashion.
The last four calendar years bear testimony to this fact the fund has consistently been delivering an above average return.
Kotak Balance
Launch: November 1999
NAV: 21.44
1-year return: 57.77%
3-year returns: 43.55%
5-year returns: 22.43%
Rating: 4 stars
Performance record
This fund too has beaten the average category returns of one year, three years and five years.
Kotak Balance has a reasonable long-term performance record. In four of the last five calendar years, it has landed a place in the top-half of the category.
Investments
The fund's tryst with mid- and small-cap stocks has proved highly rewarding. On a large-cap diet till late 2003, the fund missed the mid-cap rally that year. By the time it decided to change tack, it was too late.
The fund delivered 62.88% but fell short of the 67% average gain of its peers. However, it reshuffled its portfolio in favour of mid and smaller companies towards the end of 2003 and since then it has rewarded its investors with some extraordinary returns.
The fund does not hesitate to bet high on small-cap stocks. A high dose of mid- and small-cap stocks prove rewarding but the reward comes laced with a high degree of volatility.
This year, the fund has gained by timing its exit from non-performing sectors like auto, pharma and metals and betting on basic engineering, chemical, consumer non-durable and financial sector stocks.
The fund has also benefited by not being very rigid with its asset allocation in the past.
For example, when the stock market turned bullish early 2002, the fund reduced its debt exposure from an average of 41% in 2001 to around 33% in 2002.
In the first seven months of 2005, the investments in equity averaged around 66% of the total portfolio.
On the debt side, corporate bonds (bonds issued by companies) and gilts (bonds issued by the government) have been completely replaced by commercial paper (debt instruments issued by companies and banks to meet short-term financing needs).
What to expect
A well-diversified portfolio is a plus here. The fund always keeps 20 to 30 stocks, and limits exposure in individual stocks to around 6% at the most.
Kotak Balance fund's versatility is hard to beat. However, this fund is on steroids (its one year return is 57% against a category average of 42%). Therefore, investors should be ready to stay put for the long term. By doing so, they surely would be rewarded.
Launch: May 1999
NAV: 27.07
1-year return: 39.11%
3-year returns: 44.51%
5-year returns: 21.02%
Rating: 4 stars
Performance record
The one-year return delivered by this fund falls short of the category average. However, it has beaten the three and five year average returns.
Investments
A stress on large-caps over mid-caps, as well as considerable investments in healthcare and metal stocks, has affected the fund's performance.
But this fund has managed to bounce back out of similar situations in the past.
For example, during its early life, a tech-loaded portfolio resulted in poor performance through 2000 and 2001. It found a place in the bottom half of the category in the two years. It reacted to the situation by reducing its investments in tech companies.
The fund's performance picked up in the last quarter of 2002, when the overall sentiment in the equity market revived. Since then, the fund has never looked back. In the last two calendar years, the fund has put up a top quartile performance.
A large-cap, diversified equity portfolio together with quality debt holdings has worked for the fund.
The fund has polished its skills of protecting returns in tough times. For example, DSPML Balanced lost less than the average loss of its peers in the first half of last year. In the first quarter of 2003 too, the fund slipped only 1.28% against the 3.96% average loss of its peers.
What to expect
This fund is a good turnaround story. A low risk debt portfolio and a bias towards large-cap stocks makes this fund a safe choice.
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