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Aarati Krishnan

INVESTORS in the Tata Young Citizen's Fund (TYCF) can hold on to their investments, given its satisfactory five-year track record. The fund has generated returns of about 49 per cent over the past year.

After adjusting for TYCF's lower equity component, this compares well with the majority of the balanced funds in operation, except for HDFC Prudence. The TYCF pegs its equity exposure at 50 per cent or less, while most other balanced funds hold their equity component at 60-65 per cent.

But two of the fund's features reduce its attractiveness to new investors:

One, since it is positioned as a children's plan, the fund charges a fairly hefty exit load of 3 per cent if investments are pulled out within three years. The exit load falls to 2 per cent for exit within seven years. In contrast, open-end balanced funds usually charge no exit loads, allowing you greater flexibility to redeem your units in the event of your needing cash or the fund turning in a poor performance.

The exit load may not appear significant now in the midst of a bull market, when returns from the fund have been in the double digits. But the load may bite into returns, if you decide to pull out during a subdued phase in the stock market.

Second, over the years, the fund has used bonus offers, rather than dividend payouts, to reward investors during periods of good performance. Bonus offers make sure that any gains made during the bullish phases remain invested in the fund itself. Whereas, dividend payouts may be more desirable from the point of view of investors, as they help you cash in on part of the returns, providing protection from a market reversal. However, investors can get around this by booking profits periodically.

Performance: The fund has generated annualised returns of 18 per cent over a five-year holding period and 14 per cent in the eight years since its launch.

The recent good run has added significantly to these returns. But the fund has also consistently beaten a balanced benchmark (with a 50:50 equity:debt mix) on a year-to-year basis, since 1998.

: The fund's equity portion has been maintained at less than 50 per cent through periodic rebalancing. In terms of investment strategy, the equity portion appears to be aggressively managed, while the debt portion has been managed quite conservatively.

The equity portion features quite a few mid-cap stocks, with United Phosphorus, Lupin Labs and Alok Industries figuring among the top holdings. While these holdings have, no doubt, contributed to the fund's good show in the recent times, they also add significantly to its risk profile.

On the other hand, the debt portion of the TYCF portfolio appears to be managed for safety, rather than for high returns. The debt portion is invested mainly in gilt and triple-A rated securities, with a medium maturity profile.

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