With demonetisation leading to a cash crunch, a cut on discretionary spends and write-down of growth projections for the economy, the stock markets have been on tenterhooks in the last few weeks. Investors who wish to ride out the volatility safely can consider equity-oriented balanced funds. These funds invest up to 35 per cent in debt instruments, providing good downside protection. With returns better than higher-risk, pure equity funds such as HDFC Equity or HDFC Top 200, HDFC Balanced is a good fit for the portfolio of a conservative investor.

Strategy and performance

HDFC Balanced has scored over HDFC Prudence in iffy markets such as 2011, 2013 and 2015. This is because the fund usually takes 30-35 per cent exposure to debt, cash and cash equivalents across market cycles, compared with 25-30 per cent exposure taken by HDFC Prudence.

While the fund did lag Prudence in rallies in earlier years due to its more conservative approach, it pulled up its socks in the 2014 rally. What helped was the timely increase in exposure to mid and small-cap stocks, which were favoured by investors in this period. The fund held 25-30 per cent of its equity holdings in mid and small-cap stocks in 2014, which it has since reduced to around 15 per cent now, due to the overheated valuations in this space.

The fund also latched on to the rally in bond prices in 2014 quite well, gradually increasing its government securities holding from 6 per cent in January 2014 to 20 per cent by December 2014.

HDFC Balanced fund has outperformed its category average by a convincing 3-5 percentage points over one, three and five-year periods. In these time-frames, the fund has marginally bettered the returns of HDFC Prudence as well.

Portfolio choices

On the equity side, banks and software are usually the top sector choices. The fund has increased its exposure to banking stocks by about 3 percentage points since the beginning of this year to 18 per cent currently, adding to its holdings in SBI and entering IndusInd Bank and City Union Bank. HDFC Bank, where it holds 5 per cent, is the fund’s top bet.

On the other hand, with headwinds from a global slowdown impacting the software space, the fund has halved its holdings to about 5 per cent now compared with a year ago. It is currently betting on domestic cyclical themes such as construction, auto and auto ancillaries.

On the debt side, government securities (13.6 per cent), non-convertible debentures (9 per cent) and fixed deposits (2.2 per cent) are the top three allocations as per the latest portfolio. As regards fixed income investments, the fund generally plays it safe, going predominantly for AAA and AA rated instruments. The current portfolio includes AAA rated instruments of companies such as Power Finance Corporation, Tata Sons, SBI and HDFC Bank. AA rated instruments include NCD of Shriram Transport Finance, Hindalco, Cholamandalam Investment & Finance and Tata Motors Finance.

Published on December 3, 2016