Balanced funds, as the name suggests, are hybrid funds which typically invest in equities and debt instruments. There are equity-oriented as well as debt-oriented hybrid plans.
The advantage of a balanced fund primarily is that it achieves a certain amount of diversification, in the investment made, automatically. The asset allocation is taken care of by the fund manager, as they typically rebalance the portfolio on a need basis. So, if a balanced fund typically has a 70:30 asset allocation towards equity and debt, the fund manager will typically maintain this, barring unusual circumstances. Unusual circumstances can be situations where there is too much market turbulence or the markets are headed one way and there is a chance of overheating.
The benefit of having a balanced fund became apparent when the markets plummeted in 2008 — balanced funds, due to their exposure to debt investments, suffered lesser losses compared to equity funds.
So, the most important benefit of investing in a balanced fund is to ensure a desirable asset allocation, which is insulated from the sudden euphoria or the depths of panic, which normal investors are typically prone to.
The other advantage is in terms of the risk adjusted returns that a balance fund offers. There have been instances of equity-oriented balanced funds outperforming, even equity funds, which is very significant, considering that an equity-oriented balanced fund will maintain 30-35% allocation to debt investments. There can be some explanation for that. One of the reasons could be that the fund manager is aggressive on the equity portion and has a significant mid-cap and small-cap exposure. Also, it could be a measure of the stock picking and portfolio management capabilities of the fund manager.
HDFC Prudence Fund (an equity-oriented balanced fund) was able to outperform probably due to its midcap exposure, high conviction picks and buy and hold strategy. This fund has beaten the average performance of large cap (19%) & midcap-oriented schemes (10.25%), over a five-year period convincingly with a 23.25% CAGR. This is not the only balanced fund which has given a CAGR of over 20%. Canara Robeco Balanced Fund, DSP BR Balanced fund, Birla Sunlife 95 and some others, have also given over 20% CAGR, over a five-year tenure.
Some of the things that one should look at while investing in balanced funds are as follows:
Ø How has the long-term performance been;
Ø What's the experience of the fund manager in the long term and keeping track of the risks taken by the fund manager – in terms of the aggression in the equity and debt components.
But, is there any downside to balanced fund investing? Yes, there is. Since there is both the equity and debt component in the portfolio, and their performance is not disclosed separately, one is not sure about the performance of the equity and debt portions. It can be that the equity portion is doing well but the debt portion may give a middling performance. One can never be sure of this. But still, this is a minor factor. There is enough persuasive evidence to finally settle for some well-chosen balanced funds.
