The Hindu Business Line : HDFC Prudence: Invest

HDFC Prudence, a balanced fund, is a good investment option for those looking for a less risky alternative to a pure equity fund. The fund is an ideal fit for investors looking to put away money towards their long-term financial goals such as children's education or retirement.

The hybrid structure provides a measure of protection against downside risks in the stock market. At the same time, good stock selection has helped the fund deliver returns that are comparable to a pure equity fund. With an equity exposure of just 60-65 per cent, HDFC Prudence has managed returns that are better than an investment in the Sensex basket.

Flexibility

This fund has considerable flexibility built into its investment strategy. Its terms allow equity investments to vary anywhere between 40 and 60 per cent of its portfolio, while the balance is parked in debt. In practice, the fund has tended to take a stable stance on asset allocation for a few years at a time. Over the past five years, the fund has been overweight in equities, with about two-thirds of the assets invested in stocks. This has paid off in a bull market, with the fund earning a 40 per cent annualised return over the past five years.

The recent months have, however, seen a subtle shift in the asset allocation towards debt. The proportion of equity in the fund's portfolio has shrunk from 65 per cent of assets in the months before that, to about 60 per cent since November 2005. The allocation to stocks has thereafter remained in 59-60 per cent range. The fund appears to have regularly re-balanced its portfolio towards debt, using the run-up in equity values to book profits on stocks.

CONSERVATIVE ON DEBT

The fund has taken a conservative stance with its debt investments, sticking mainly to triple A-rated corporate debt. Stock choices, however, have been more aggressive, with the equity portfolio featuring a sizeable allocation to mid-cap stocks. Over the past year, about a third of the equity portfolio has been invested in stocks with a market cap of less than Rs 2,000 crore. Software, auto and capital goods have been the key sector choices over the past few months.

Is HDFC Prudence a good alternative to constructing your own portfolio of equity and debt funds? It has been, over a five-year period. A person who invested 65 per cent of his portfolio in HDFC Equity Fund and the rest in a debt option earning 6 per cent a year, would have earned a 29 per cent annualised return on his investment between March 2001 and now (without re-balancing). With HDFC Prudence, the returns have been higher at 40 per cent a year.

The latest Budget proposes to restrict dividend and capital gains tax benefits only to funds that have at least 65 per cent of their portfolio invested in stocks.

HDFC Prudence, with its conservative equity exposure, may be on the borderline. The fund has clarified that it will make the changes necessary to enable it to take advantage of the tax benefits. However, the fund says that tax benefits will not impact the asset allocation decision, because the tax benefits may not be material in a period of low stock market returns.

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