Markets

Double delight for balanced funds as equities, bonds surge

K Venkatasubramanian | Updated on January 24, 2018

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Conventional wisdom is that for higher returns, you must take on higher risk. But balanced mutual funds have turned that perception on its head. Despite investing in a mix of safe debt instruments and shares, these schemes have beaten the equity indices over one-, three- and five-year timeframes.

As a category, balanced funds (with a 65-35 equity-debt mix) have delivered a 49 per cent return in the last one year and a 20.3 per cent annualised return over the past three years.

They have outperformed bellwethers such as the Nifty and CNX 500 by three-four percentage points. These hybrid schemes have also beaten bluechip equity funds by 1-1.5 percentage points.

Outperforming indices

Schemes such as HDFC Balanced, Tata Balanced, Birla Sun Life 95, Canara Robeco Balanced and SBI Magnum Balanced have delivered 55-64 per cent returns in the last one year, outperforming indices and several equity schemes by a long chalk. This isn’t the usual state of play for balanced funds. They have fared exceptionally in the last one year because both stock and bond prices have rallied. Balanced funds invest 65-70 per cent of their portfolio in equity, and the rest in bonds and government securities. This makes the overall portfolio less risky than pure equity schemes.

Most balanced funds invest 75-80 per cent of their equity portfolio in large-cap stocks, with the rest parked in mid-caps. This means the equity component of these funds have benefited not just from the rally in bluechips, but also from the gains made by mid- and small-cap stocks.

The debt portion of the portfolio is invested in government securities and highly rated corporate bonds.

As the yields on 10-year G-Secs fell from over 9 per cent to about 7.7 per cent in the last one year, the debt portfolio of the balanced funds soared.

Today, if the equity market were to fall sharply, the equity portfolio of these funds may take a hit. But the debt component is likely to earn steady interest as also log capital gains so long as market interest rates are falling.

So even if the market corrects, the NAVs of balanced funds are unlikely to dip as sharply as those of pure equity schemes if markets correct. Essentially, you get better returns with lower risk.

Published on February 15, 2015

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