Old war horse, back in action

Investors looking to participate in the equity rally but with the cushioning effect of debt, can invest in HDFC Prudence, a balanced fund with an excellent long-term track record.

The scheme has been around for more than 20 years and has delivered a strong return of 20 per cent annually over this period, which would put even quality diversified equity funds in the shade.

HDFC Prudence is not like any typical balanced fund that may take a conservative approach. Instead, the scheme goes all out to juggle the right kind of stocks, not averse to taking substantial mid-cap exposure and also remain invested in equity to the tune of 75 per cent of the portfolio almost across all market cycles.

Of course, what stabilises this approach is the safe bets it takes with respect to its debt portfolio and investing only in highly rated instruments of quality financial institutions, apart from its sovereign exposure.

Over one-, three- and five-year timeframes, HDFC Prudence has done much better than its benchmark – Crisil Balanced, as well as its peers. In the last five years, the scheme has delivered 19.2 per cent annually, which is higher than the likes of ICICI Pru Balanced and Tata Balanced.

It scores over the category’s average returns by 2-6 percentage points across timelines and has always remained a top quartile performer over the long term.

The scheme participates extremely well during market rallies, especially in prolonged ones, but falls in line with its benchmark or a bit more during falls. HDFC Prudence can form the core part of the portfolio of any investor with a moderate risk appetite. But the time horizon must be five years at least.

The fund’s top picks are usually stable names from the Nifty or the BSE 100 basket. But HDFC Prudence also takes exposure to mid-cap stocks to the tune of 25 per cent of the portfolio, which ensures that it is able to participate in broader market rallies. In the market upswings of 2009, 2012 and in the recent surge, the scheme has surged ahead of most of its peers.

Banks and software have always been the top segments held across market cycles. Except banks, its holdings in other sectors have been less than 10 per cent, thus avoiding any concentration. Over the last few years, its top segments have been shuffled in tune with the market conditions. So, it has reduced exposure to pharma and consumer non-durable stocks, while increasing stakes in sectors such as auto and petroleum products, as the prospect of an economic revival becomes imminent.

Exposure to individual stocks has been less than 5 per cent most of the time barring a few names. It maintains a well-diversified portfolio of 55-70 stocks, which reduces its risk profile somewhat, even though it takes significant mid-cap exposure.

The fund's debt exposure is mainly in government securities, which have a long-term maturity profile. The rest of the debt exposure is to bonds, debentures and NCDs of financial institutions such as SBI, PFC, IRFC and PNB. Most of these instruments have the highest rating of AAA. Invest in the scheme for above-average returns with a horizon of five-seven years, preferably through the SIP mode.

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