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July 26, 2017

Balanced funds - An opportunity to benefit from diversification

While debt has been the preferred asset class of Indians, in recent years equity has become the cynosure of investor's eyes, thanks to the strong returns shown by the asset class and falling debt yields. A singular investment in any of the two asset classes has its perks and perils; for instance, equity is meant for high-risk takers, while debt is for the risk averse. But what if you can get aproduct that can provide the benefit of diversification between these two asset classes? The answer lies in balanced funds.

Superior performance
Being a hybrid product, the equity exposure of balanced funds is typically at 65-80% of the assets under management (AUM), with debt forming 20-35%.The objective is to earn a higher risk-adjusted return through diversification between equity and debt. This has augured well for the category, compared with pure equity and debt-oriented fund categories.

 

Despite part allocation towards debt, the performance of balanced funds(represented by CRISIL-AMFI Balance Fund Performance Index) has been at arespectable level, compared with pure equity funds (represented by CRISIL-AMFI Equity Fund Performance Index). Infact, the CRISIL-AMFI Balance Fund Performance Index has even out performed the CRISIL-AMFI Equity Fund Performance Index over the long term (10 year period; see chart 1). Thanks to the debt exposure, the balanced funds’ downside risk is effectively captured compared with pure equity funds. The risk-return matrix (chart 2) shows that though the three-year returns of balanced funds are a tad lower than pure equity funds, the former’s volatility is considerably lower compared with the latter. This showcases that balanced funds have the ability to offer better risk-adjusted returns versus pure equity funds.