Books
Columnists
Indian Tax
Insurance
Interview
Lifestyle
Mutual Funds
NRI Tax
Personal Finance
Personal Banking
Real Estate
Stocks
Travel

'Balanced' funds, ill-balanced funda!

Aabhas Pandya

If you thought your balanced fund was an ideal mix of steady returns and adequate safety, you couldn't have been more wrong. In one of the most volatile periods on the Indian bourses, the last two months have shown that even balanced funds are not suited to safeguard your investments in a falling market. After diversified equity funds, balanced funds have fallen flat in lure of the ICE candy.

In less than two months (between March 7 and April 28), balanced funds have lost an average 27.12 per cent, a drastic fall by any stretch of imagination, given the investment objective of balanced funds. The average equity exposure in these balanced funds is 67 per cent. These funds are not very far from their diversified equity counterparts, which have lost an average 35 per cent. The worst hit is Magnum Balanced from SBI Mutual Fund, which has lost a whopping 46 per cent with its NAV down to 29.57 as on April 28. While the equity exposure stands at 78 per cent exposure, ICE alone accounts for a whopping 63 per cent.

In some cases, balanced funds have fallen nearly as much as equity funds under the same AMC. For instance, while Prudential-ICICI Balanced Fund has lost 38.27 per cent to Rs 10.37, Prudential-ICICI Growth Plan (the equity flagship) dropped 40.64 per cent to Rs 24.6. Prudential, with an equity allocation of 69 per cent, is within its stated band of 51-80 per cent. The fund has a 44 per cent weightage to software and telecom.

Consider Birla Balance, which had mopped up a record 335 crore in September last year. At the time of launch, Birla Balance had built its ad blitzkrieg around the slogan - safer than equity, better than debt. However, the slogan now rings hollow since the balance fund has lost a whopping 33 per cent at Rs 12.36 as on April 28 against a 34.69 per cent drop in its equity flagship, Birla Advantage. Birla Balance has an 80 per cent exposure to equities as on March 31 (against a cap of 75 per cent) with a 58 per cent investment in ICE stocks.

	Stated Equity allocation	Actual Equity Allocation	NAVs	NAVs
		(as on March 31, 2000)	07/03/2000	28/4/2000	% fall
Magnum Balanced	50-100%	78%	54.66	29.57	45.90
Pru ICICI Balanced	51-80%	69%	16.8	10.37	38.27
Birla Balance	75%	80%	18.41	12.36	32.86
Alliance '95	upto 60%	64%	88.19	60.16	31.78
Sun F&C Balanced	51-75%	67%	12.41	8.87	28.53
DSPML Balanced	30-70%	58%	14.68	11.2	23.71
JM Balanced	NA	61%	22.73	17.36	23.63
Kothari Pioneer Balanced	51-60%	67%	11.96	9.47	20.82
K Balance	51%	62%	14.263	11.46	19.65
Zurich India Prudence	40-60%	59%	27.8	26.11	6.08

The best performing balanced fund is Zurich Prudence, which has lost only 6 per cent in the recent meltdown. Though the fund has a 59 per cent exposure to equities, it has put only 11.4 per cent in software and entertainment sectors with no exposure to telecom. The auto sector carries the maximum weightage at 11 per cent as on March 31, 2000. The fund has not gone overboard in its investments to ICE stocks to generate abnormal returns and has a well-diversified portfolio. The fund has still given an impressive return of 58 per cent for the one-year ended March 31, 2000 and is ranked fifth among balanced funds.

While most of the funds have invested in equities as per their stated band, the question is whether such flexible investment band should be permitted. Most fund managers have been blinded in their pursuit of stocks from the ICE sector, replicating stocks across funds while conveniently forgetting the stated investment objective. The flexible investment pattern (the fund could have 51-75 or 80 per cent in equities) has come handy.

However, Investors in balanced funds are a different class, who have graduated from debt or monthly income plans for better returns but their primary concern continues to be safety of principal.

Last year saw investors pour around Rs 1000 crore in balanced funds as interest rates dropped and AMCs went on a selling binge, driving home the virtues of a balanced portfolio. Looks like these AMCs will now have a lot of explaining to do to their investors.

Source: Value Research

Mutual Funds

Tell us what you think of this news