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Suresh Krishnamurthy

GIVEN the encouraging performance of IDBI Principal Balanced Fund in the last 12 months, investors can stay with the fund. However, fresh investments may be contemplated after a fresh evaluation of performance.

Further evaluation is necessary in the backdrop of its tilt towards equity and the consistent presence of a high level of cash in its portfolio. How the fund invests this cash proportion would determine its risk profile. In addition, performance in the last three months has been below par. In this backdrop, fresh investments need not be contemplated now.

Suitability: The absence of a constant mix approach to managing the fund suggests that the asset allocation strategy is based on the manager's outlook for the equity market. This could increase the volatility of the NAV over a shorter time frame.

Review: IDBI Principal Balanced Fund is a relatively smaller balanced fund with net assets under management of just under Rs 14 crore. There is evidence of minor redemption outflow from the fund during the last 12 months.

The fund has, however, done quite well in the last 12 months. At a time when the leading indices recorded declines, the fund recorded returns of around 15 per cent. This is encouraging, given the substantial equity investment.

However, two factors need to be considered:

The equity proportion has stayed beyond 60 per cent for more than six months now.

The cash position has generally been maintained at considerably higher levels

The significance of these two factors may not be totally favourable. The implication is that the fund manager favours allocation to equity based on the fund's view on the market.

If such active calls on market movements fail, the fund's performance can falter. In India, most of the balanced funds that have adopted such tactical asset allocation strategies have failed to do well.

Alternatively, the high cash position could be a temporary phenomenon and may finally be invested in the debt segment. This remains to be seen over the next few months.

In terms of equity investments, the fund has been overweight on consumer goods stocks and underweight in almost all other major sectors.

On an overall basis, this strategy has paid off. It helped the performance, especially until August 2002. In contrast, in the last part of the financial year, the sectoral preferences have largely backfired. The fund's substantial underweight position in IT stocks relative to the indices has led to considerable under-performance in the last three months.

In terms of stock selection, the fund was one of the early movers into PSU and mid-cap stocks such as BPCL, BHEL, Container Corporation, Blue Dart, SBI and I-flex Solutions. This would have helped the fund generate superior performance in the earlier part of the year.

Investments in stocks such as Asian Paints, Bajaj Auto and Telco would have helped in the later part of the year but not to the extent of keeping pace with the market.

The fund has preferred to allocate less to debt than most balanced funds. The performance may have suffered because of this as, last year, debt investments generated reasonable returns. Though its smaller size does not allow active debt management, the fund is now exposed to three sectors — corporate debt, securitised debt and government securities. This is encouraging from a longer-term perspective.

Overall, the performance is good enough for investors to stay on now. However, further evaluation over the next six months may be necessary to consider adding to exposures.

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