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L&T Prudence, an equity-oriented balanced fund, is a good choice under the current market conditions. It brings the best of both worlds for investors who are wary of the dizzying heights that the market has reached but at the same time do not want to miss out on further upside if the exuberance continues.
The fund is mandated to invest at least 65 per cent in equities, which will help investors participate substantially in a rally. However, the fund can take up to 35 per cent exposure to debt. This will provide a much needed cushion should the market correct sharply.
Strategy and performance
L&T Prudence never goes too high on equity exposures, even in secular bull runs. It ranges at 65-75 per cent at all times — towards the lower end in falling or volatile markets and towards the higher end in rallies. In the 2017 upswing, for instance, the fund held 70-75 per cent in equities throughout to cash in on the optimism.
Secondly, it tends to become conservative in its market-cap preferences when the market appears heated up. Thus, while it held up to 30 per cent of its equity holdings in mid- and small-cap stocks ( those with market capitalisation of less than ₹10,000 crore) in 2013- 2015, the fund slowly turned cautious after that. It plays conservative on the debt side too, predominantly choosing AAA and AA rated bonds.
The fund churns its sectors and choice of debt instruments well depending on market conditions. In 2014, for instance, the fund’s move into government securities was well-timed. Thus, as bond yields dropped from about 9 per cent to under 8 per cent, the fund made the most of the rally in bond prices. From holdings of 15-20 per cent in non-convertible debentures (NCDs) in the beginning of 2014, it quickly moved into G-Secs, holding almost 27 per cent in the same by the end of the year.
Sector choices such as software and consumer non-durables in the 2013 volatility, banking and auto in the 2014 rally and again consumer non-durables during the iffy markets of 2016 have paid off well too.
Across one-, three- and five-year time frames, the fund has bettered the category average by 3-4 percentage points. Its returns are a notch above peers’, such as Tata Balanced, Franklin Balanced and DSPBR Balanced funds.
Current portfolio
The fund normally holds a diffused portfolio of 70-80 stocks on the equity side. Its debt holdings now are at 26.6 per cent. Considering that the valuations of mid- and small-cap stocks have moved up sharply, the fund has been pruning its exposures on this front. It its latest portfolio, it holds less than 10 per cent in mid- and small-caps.
Banking, finance and construction projects have been the preferred sectors in the last one year, with stocks mainly from among private sector banks, insurance companies (through IPO) and housing finance companies such as HDFC. It has also found value in the pharma space and increased its holdings here during the year. As bond yields have remained somewhat tepid and a bit directionless in the last one year or so, corporate bonds have replaced sovereign bonds on the debt side. It currently holds debt instruments of companies such as NTPC, Tata Motors, Power Grid, LIC Housing, M&M Financial Services and Rural Electrification Corporation.
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