We tend to evaluate performance of funds by returns only, which is what is relevant for the investor. For analytical purposes, however, the parameter is not just the returns, but risk-adjusted returns i.e. Funds having moves more than the market index will outperform the peer group during a bull phase but will lose more than the market in a bear phase.
Balanced Funds have equity allocation ranging 65% to 70%. For an investor positive on India's growth story, the choice is between focused equity fund on one hand and a balanced fund with 65%-70% allocation to equity and 30%-35% to debt, on the other hand. Though in the long run, returns from equity are higher than debt, debt component adds stability to returns during phases of market volatility. In the long run, adding up the phases of relative underperformance against focused equity funds and outperformance in bear periods, balanced funds deliver good risk-adjusted returns.
To look back at performance as a straight line and not as per bullish and bearish phases, over the last one year till 3 March, Crisil Balanced Funds - Aggressive Index shows a return of 16.5%, lower than Nifty 50 return of 18.9%. Over last five years, balanced funds return is 10.6% compound annualised per year, similar to Nifty return of 11%. The unique selling point is that over last 10 years, this category has yielded 9.7% compound annualised per year against Nifty return of 9.5%. This, along with the 30%-35% allocation to debt and consequent lower volatility. Hence, it offers the best of both worlds, competitive returns over the long term along with lower volatility.
The appeal of balanced funds can be gauged from the assets that are being built up in this category. The assets under management (AUM) in this group of funds, which was Rs 26,400 crore as on 31 Mar 2015, moved up to Rs 39,000 crore on 31 Mar 2016 and is currently at Rs 71,000 crore on 31 Jan 2017. While equity assets have grown as well over this period, growth in AUM of balanced funds has been faster. The AUM of equity funds has grown from approximately Rs 3.67 lakh crore on March 2015 to approx Rs 5.65 lakh crore in January i.e. the current AUM is 1.54 times that of January 2015. As against this, the AUM of Balanced Funds has grown to 2.7 times, from Rs 26,400 crore on March 2015 to Rs 71,000 crore currently.
Since the market is peaking and quite a few positives have been discounted at current levels, balanced funds are suitable for investors who want to benefit from the India growth story but prefer a relatively lower volatility, leading to better risk-adjusted returns over the holding period.
The writer is independent financial advisor and author
