The sharp rally in equities has left many investors wary of testing the waters. For such investors, a debt-oriented balanced fund, which allocates 10-25 per cent in equity and the balance in debt instruments, is a good option. While these funds provide healthy returns in a rising market, they also lend stability in a falling market.
HDFC Children’s Gift Savings plan is one such fund worth investing in. The fund’s one- and three-year returns are 23 per cent and 11.7 per cent, far higher than its benchmark — CRISIL MIP Blended Index — returns. The double-digit returns delivered by this fund since its inception have beaten inflation too.
Investors have gained during boom times as well. In the 2009 rally as well as the very recent one in 2014, the fund has delivered a healthy 18-23 per cent return.
Portfolio The fund has invested about 18 per cent in equities over the last five years, which has helped deliver good returns. It adopts a buy-and-hold strategy and does not churn its portfolio very often. On the equity front, since January this year, the fund has increased its exposure to banks such as ICICI Bank, SBI, Axis Bank and Indian Bank. It also added to auto ancillary holdings through stocks such as Sundaram Fasteners, Suprajit Engineering and Balkrishna Industries. It reduced its holdings in pharma and software stocks. Other than banks, the fund’s top holdings include Infosys.
On the debt side, the fund has invested 44 per cent in government bonds and 31 per cent in non-convertible debentures. It increased its average maturity from 2.5 years in January to 6.9 years now, clearly taking an aggressive call on interest rates. With interest rates ruling high, any downward reversal will benefit the fund.
The only weak link is the fund’s high expense ratio at 2.6 per cent, which may eat into returns.
Growth option If you are not particular about periodic cash flows, go for the growth option instead of dividend payout. This is because post Budget, there has been an increase in dividend distribution tax. The company has to pay a dividend distribution tax on the dividend before it gives it to the investor.
Unlike interest earned on deposits, which is taxed as per your tax slab, returns from the fund will be taxed when redeemed. If you hold it for over three years, you can reduce your tax outgo through indexation.