HDFC Balanced Fund: Invest

It is seldom that both debt and equity markets offer attractive buying opportunities to investors at the same time. We may be in just that situation now.

As rising interest rates have resulted in 10 per cent-plus returns on safe 3-5 year debt options today, equity markets are in a free fall, offering buying opportunities to long term investors.

Should you take the plunge into equities or opt for safe debt? You can do both, with good balanced funds such as HDFC Balanced Fund. The fund has been firmly ensconced among the top three balanced schemes consistently for one, three and five-year time frames. Its returns of 10.4 per cent for one year, 20 per cent (compounded annual returns) for three years and 16 per cent for five years place it well ahead of the benchmark CRISIL Balanced fund index and also many pure equity schemes.

Downside Checked

With a 65-70 per cent exposure to equity and the remaining parked in debt instruments, HDFC Balanced fund has managed to contain the declines in its NAV well during weak phases in the stock market. In 2008, when the Nifty fell 52 per cent, the fund's NAV decline was contained at 36 per cent, a feat not managed by most equity funds.

In the rebound since then, HDFC Balanced has delivered good participation, more than doubling its NAV over 2009 and 2010.

With the choppy phase in the stock market, the Nifty has tanked 13 per cent so far in 2011, but HDFC Balanced has managed to keep its NAV in marginally positive territory.

A study of the fund's portfolio over the past year reveals three key aspects of its strategy. One, the rebalancing of portfolio from time to time to keep equities in the 65-70 percent levels may help contain NAV declines in the fund. Two, while the debt portion is managed with an eye to safety (the majority of exposures are either AAA or P1+), the equity portion takes on some risk, in the form of mid and small-cap stocks.

In the June 2011 portfolio for instance, Motherson Sumi Systems and Balkrishna Industries vied for top equity positions with Reliance Industries, TCS and Coal India.

Three, the debt portion has been actively managed too. However, the fund has shifted between corporate bonds and certificates of deposit to make the best of high yields on bank deposits and corporate debt.

Between January and June the fund cut back on its corporate bond exposures and raised allocation to certificates of deposits from banks, which offered higher yields.

The fund appears well placed to sustain its recent performance over a one-two year time frame, given that stock market valuations have corrected to long term averages and that a tight liquidity situation is holding up interest rates.

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