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Aarati Krishnan

HDFC Prudence, the balanced fund from the HDFC stable, has regained its place among the top performing balanced funds over the past year with returns of about 17 per cent.

Given the fund's impressive five-year record, investors can consider fresh investments in it. Investments can be made through the systematic investment plan to reduce the downside risks associated with stock prices.

Though balanced funds such as Magnum Balanced Fund and Kotak Balance have caught up with the fund's on one-year returns in 2004, HDFC Prudence remains leagues above the second-best fund on a three- and five year-return basis.

Suitability: Because they invest in a mix of equity and debt, balanced funds are usually suitable for investors who would like to take measured exposures to equity, without taking on the hassle of re-balancing the portfolio at regular intervals.

HDFC Prudence remains the best choice for such investors in the balanced fund universe. However, investing in a balanced fund may involve a compromise on the returns earned by the debt portion of an investor's portfolio.

Investors should take the balanced fund route only if they place a premium on liquidity. For those who do not, investing directly in a combination of equity funds and small savings instruments may yield better results.

Performance: With one-year returns of about 17 per cent, HDFC Prudence figures among the top three funds in the balanced category for this period, bettered only by Magnum Balanced Fund and Kotak Balance.

However, evaluated over a longer time-frame of three or five years, other balanced funds are yet to catch up with HDFC Prudence's impressive return record. The fund has outpaced the Crisil Balanced Fund benchmark.

Over a five-year period, the fund has generated a return of about 20 per cent on an annualised basis. Over the past year, the fund's asset allocation has remained practically unchanged, with a 65:35 allocation between equity and debt.

The fund's returns over 2004 also compare well with a direct investing strategy of parking 65 per cent in HDFC Top 200 Fund (an equity fund) and 35 per cent in HDFC Short Term Plan (a short term debt fund). This would have yielded a return of roughly 9 per cent. This represents a break from the past and speaks well for the fund manager's stock selection skills.

However, with the bulk of its debt portfolio parked in corporate bonds, rather than money market instruments, the debt portion of Prudence's portfolio is not likely to have contributed substantially to these returns.

For investors who have the option of investing in the small savings schemes of the government, which offer islands of high returns in the debt universe, investing in a balanced fund would entail an opportunity loss.

However, this need be a factor only if an investor does not require the high levels of liquidity offered by an open end fund.

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