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This is an archive article published on November 10, 2002

The Balancing Act

THERE is something distinct about balanced funds—they make things easier for you. When you can’t decide whether a stock or a bond ...

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THERE is something distinct about balanced funds—they make things easier for you. When you can’t decide whether a stock or a bond fund is better for you, balanced funds offer you the best of both worlds, offering both in one convenient package. In a sluggish stock market and when bond yields are slipping, their attractiveness has grown.

Balanced funds provide for a smooth sailing as compared to equity schemes and are relatively less volatile also. For instance, the three-year standard deviation—a measure of volatility of an average balanced fund was 5.8, as on September 30, 2002. The corresponding figure for equity-diversified funds was

9.37. However, this relative stability of balanced fund comes at the cost of lower returns. If these funds won’t turn in mind-boggling returns in a bull market, they won’t also be heavily impacted during a downturn. Investing in balanced funds is also cost-efficient because if you were to buy stocks and bonds yourself, and also manage them, the expenses incurred would eat into your returns.

Their two and three year loss of 1.04 and 0.77 per cent may seem bad at first but then remember an average equity diversified fund lost 6.42 and 10.92 per cent over the same period. The BSE Sensex was also down by 10.76 and 15.28 per cent in the same time. While bond funds were up 14.45 and 13.34 per cent over two and three year period. Thus as a category, balanced funds are designed to fit firmly in the middle of the risk return spectrum, and that’s just what they’ve done. These funds act as a risk diversification tool. Bonds provide the stability and a stable flow of income, while stocks give them the upside potential, of course with the intermittent volatility. Portfolio diversification models suggest that optimal risk-adjusted returns are achieved with some kind of balance between equities and fixed-income securities. Usually, these funds keep stock and bond weights at 60:40.

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However, there is no hard and fast rule that a balanced fund should necessarily follow a 60:40 allocation. No doubt there was a time when most balanced offerings looked like pure equity funds. This was because stock markets were on a high. For example, Birla Balance and Magnum Balance had around 80 per cent into equities in March 2000. However, as on September 30, 2002, the average equity-debt allocation of the 40-funds of the Value Research Balanced Funds category was 53:47. Canganga currently has the highest 72 per cent equity exposure—and is among the top losers in the category. Year-to-date, its loss is 8.52 per cent against 3.17 per cent gain for an average balanced fund.

If you are long-term investor seeking capital growth, want to keep it simple and can not take the high volatility of an equity fund, then balanced fund could be the right way to go. And the ideal fund is one which consistently retains its balance and diversity. Thus, while selecting the right balanced fund, an investor should review his/her risk-taking ability and the equity and bond split of their overall portfolio. One should go in for a diversified yet actively managed balanced fund, which is dynamic and has proven track record of being balanced across varied conditions.

Avoid funds, which get concentrated in one sector. During the rally of 1999-2000, around 14 balanced funds were launched. Riding high on the tech frenzy, these funds went overboard on tech, and, hence, lost their balance. As a result, 10 funds went below par within two months of launch. In 2000 though, an average loss of 11.48 per cent posted by 23 balanced funds was far less than an average 26 per cent loss recorded by diversified equity funds—almost 20 per cent of the balanced funds lost twice as much as the average loss in the category.

Today, most balanced funds have diversified portfolios with a small tech holding. For instance, Alliance 95—the only 5-star funds according to the Value Research Fund Rating—as reduced its tech exposure from 41.45 per cent in March 2000 to 21 per cent as on September 30, 2002, but it has increased its auto exposure to 9 per cent. Others like Birla Balance and Magnum Balanced—which were heavily into technology (51 per cent and 56 per cent, respectively) in March 2000—lost a whopping 27 per cent and 30 per cent, respectively. However, as on September 30, the tech exposure has been pruned to 13 per cent and 9.55 per cent. Apart from technology Birla Balance is also concentrated on Healthcare (13.52 per cent). While Magnum Balanced is maintaining a diversified portfolio, spread across eleven sectors.

My picks include:

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Alliance 95: Tough to justify as a balanced fund, but it is surely more stable in a family of aggressive funds. A hard-core tech believer, this fund’s was bruised in the tech wreck. But, for its solid long-term track record it is still a fine choice. Growth investors looking for a little blast should like Alliance ’95.

Zurich India Prudence: Prudence may earn the ‘balanced’ distinction in structure. This disciplined equity-tilted fund doesn’t believe in chasing higher returns in the short run. It prefers to buy and hold stocks. So, for the long-term investor there is a lot in store.

Can Premium: Investors in search of an income minded balanced fund will like Can Premium. Clearly different from its peers, this 4-star fund has had a debt orientation—average 68 per cent debt and 32 per cent stocks. Likely to suit the taste buds of a conservative investor, this fund, though small in size, has been the best performer in its category across time periods.

The author is the chief executive of Value Research, which tracks mutual funds. He can be reached at dhiren@valueresearchindia.com

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