Balanced fund HDFC Prudence has proved it mettle in beating pure equity funds over the long term, despite holding a fourth of its assets in debt. Taking on almost three–fourth the risks assumed by a pure equity fund, its consistent performance across market cycles and ability to clock better risk-adjusted return makes it a fit candidate for a core equity portfolio.

It's three and five-year compounded annualised return of 19 per cent and 15 per cent is superior to the some of the top performing equity funds including another top fund from the same stable HDFC Equity.

The fund also outpaced its benchmark Crisil Balanced Index by a whopping 14 percentage points and eight percentage points respectively over the above time-frames.

Having said this, during rallying markets the fund does tend to underperform equity funds given that its exposure to equity is lower. However, such performance is made up over the long term as the fund outperforms during volatile times, such as the ones seen in the last couple of years.

Performance : Over a one-year period, the fund's NAV shed close to six per cent in value and marginally trailed its benchmark Crisil Balanced Index. It also trailed some of its peers such as HDFC Balanced. There are a couple of reasons for this: one, the fund upped holdings in large-caps unlike peers, which had higher exposure to mid-caps.

Large-caps, especially in the financial and energy space (sectors where HDFC Prudence has high holdings) have underperformed during this phase. The one-year underperformance may therefore be temporary.

The fund still bettered the performance of Sensex and Nifty by six percentage points in the last year. It managed this despite lower exposure to the top-performing sector consumer goods over the last year. The fund has also contained declines better than large-cap equity funds, thanks to its 25 per cent exposure to debt instruments.

Portfolio Overview : The top three sectors in the portfolio are banks, software and consumer non durables. The fund's exposure to single stocks is restricted to less than five per cent of the portfolio and the top ten stocks accounted for 28 per cent of the assets. The fund had invested 75 per cent of its assets in equity, of which mid- and small-cap stocks accounted for 18 per cent.

Banking stocks reeling under pressure on the back of concerns over asset provisioning and margin pressures, continued to be the preferred stocks in the last year, suggesting it could be a call on stock valuations. At a time when most of the funds are holding short-term debt papers to take advantage of rallying interest rates, HDFC Prudence holds 10 per cent of the assets in government securities, suggesting it could be expecting interest rates to peak. It also indicates lower credit risk of the debt portfolio.When inflows are hard to come by in a volatile market, the fund's asset size has grown by 25 per cent to Rs 6131 crore in the last year. The fund is managed by Mr Prashant Jain.

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