Only investors with a long-term horizon should consider this fund to make good returns.

Investors with a long-term perspective can consider investments in HDFC Prudence Fund. This balanced fund, which invests at least a fourth of its assets in debt, has consistently been a top performer in the equity-oriented balanced fund category.

Over a three- and five-year period horizon, the fund returned an annualised 15.8 per cent and 11.2 per cent, respectively.

Its benchmark, CRISIL Balanced Fund Index, returned 6.2 per cent and 6 per cent, respectively, over the same period. The fund not only outperformed its benchmark but also delivered returns comparable with top diversified equity funds.

Suitability

The fund is suitable for investors who wish to have some allocation to debt to limit the downside when the market is volatile. But such downside is only protected in the short-term. During periods of prolonged correction in the equity markets, the fund can slip into losses.

On a rolling return basis over the last five years the fund has slipped into negative returns (one-year returns at any point in the last five years) as many times as its benchmark.Hence, only investors with a long-term horizon should consider this fund to make good returns.

Its sister fund, HDFC Balanced Fund, with slightly higher debt allocation, has displaced HDFC Prudence to become the top-performing balanced fund in recent times.

While higher debt allocation has helped HDFC Balanced Fund, HDFC Prudence Fund will benefit more if the equity market rallies. For instance, in the current rally (December 2011 to June 2012), HDFC Prudence returned 84 per cent in the year 2009 compared with 73 per cent by HDFC Balanced.

Investors can use the SIP route to combat prolonged volatility in the markets.

Performance and Portfolio

The fund lost 2.06 per cent in the last one year, lagging its benchmark (which lost 1.3 per cent). Higher debt allocation in the benchmark is the reason for the under-performance. If one calculates the benchmark return by taking equity-debt allocation, in line with HDFC Prudence, the benchmark would have lost more than three per cent.

The fund has a sharpe ratio of 0.95 (weekly return annualised on a risk-free rate of 7 per cent over five years) which is better than the benchmark’s ratio of 0.1 indicating active management has worked for the fund.

The fund is highly diversified both in terms of sectors and stocks. It holds at least 65 stocks in its portfolio. It has focussed on mid-cap stocks historically to improve the return of the fund (less than Rs 7,500 crore market capitalisation). The fund predominantly adopts buy-and-hold strategy in its portfolio.

Less redemption pressure lends stability to its assets under management. This has allowed it to adopt a buy and hold strategy.

Investments in stocks such as Page Industries, Tata Motors DVR, Divi’s Laboratories and Supreme Industries have supported the portfolio even as it witnessed losses in large-cap stocks such as Crompton and Greaves, Bharti Airtel and Tata Steel.

It has, over the last one year, upped its exposure to stocks in the financial space. SBI and ICICI Bank stocks witnessed higher allocation.

On the debt side, it bet on corporate debentures and government securities rather than short-term instruments. In its debt portfolio too, the fund does not churn instruments too much, suggesting that it is looking at interest payouts (called accruals) from the instruments it holds. The fund is managed by Mr Prashant Jain and Mr Rakesh Vyas. The latest NAV of HDFC Prudence is Rs 213.8.

(This article was published on June 30, 2012)
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