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Aarati Krishnan

HDFC Prudence, a balanced fund, is a good option for investors who wish to build an exposure to equities over the long term, but do not wish to expose their investment completely to equity risks. The fund has an impressive performance track record, with a 30 per cent annual return over the past five years. The sharp reversal in equities over the past couple of weeks has taken some of the edge off equity valuations. This reduces, but does not mitigate, the downside risk that would be attached to an investment in an equity-oriented fund such as Prudence.

Suitability: As a balanced fund which caps its equity exposure at 60-65 per cent, HDFC Prudence is less risky than a pure equity fund. But given its sizeable allocation to mid-cap stocks and its aggressive management style, returns can be volatile.

Performance: Though its five-year track record is significantly superior to that its peers, HDFC Prudence was not the top-performing balanced fund in 2003. But the fund has recouped its top slot over the past four months, by holding its ground well in the subsequent market reversal. Over a year, the fund has also outperformed a strategy of directly investing in a 60:40 proportion of the HDFC Equity and HDFC Income Fund.

There have been a few changes in the fund's portfolio strategy over the past year. For one, the number of stocks in the fund's portfolio have expanded significantly over the past year; from about 18 stocks in March 2003 to over 30 by March 2004. This enhances the number of calls to be made by the fund manager. The expansion in the number of stocks may be on account of the over three-fold expansion in fund size over this period, to Rs 648 crore.

Second, the fund appears to have pegged up the allocation to mid-cap stocks in the equity portion. By April 2004, about a third of the equity portfolio was invested in mid- or small-cap stocks. While this pegs up the return potential of the fund, it could also enhance the volatility of returns. Third, a portion of the debt portfolio has also been switched from corporate bonds to gilts, probably for liquidity considerations.

Equity exposure has been consistently pegged at 60-65 per cent of assets and re-balanced whenever it runs ahead of this limit. This strategy should help contain risks.

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