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Volatility is the name of the game in the stock markets these days. If you have a conservative mindset, consider investing in HDFC Balanced, an equity-oriented balanced fund.
This category of funds provides good downside protection during falling and iffy markets as they have a mandate to invest up to 35 per cent in debt. Over one, three and five years , HDFC Balanced boasts of returns on par with or better than funds that invest fully in equity such as HDFC Top 200 and HDFC Equity.
Strategy and performance
HDFC Balanced has convincingly scored over peer HDFC Prudence in volatile years for the markets, such as in 2011, 2013, 2015 and 2016. This is because the fund keeps its equity exposure on the lower side at all times.
HDFC Balanced takes 30-35 per cent exposure to debt, cash and cash equivalents compared with 25-30 per cent exposure to these instruments taken by Prudence. But this meant the fund underperformed Prudence during rallies such as 2012. However, HDFC Balanced has made amends since then. In the 2014 and 2017 rallies, for instance, the gains made by both the funds are on par. What helped HDFC Balanced score was its higher allocation to mid- and small-cap stocks.
In 2014, for instance, the fund held up to 40 per cent of its equity portfolio in mid-and small-caps (market capitalisation below ₹10,000 crore) The fund also latched on to the rally in bond prices in 2014 quite well, gradually increasing its government securities’ holding from 6 per cent in January 2014 to 20 per cent by December 2014.
Again, the fund proved to be nimble on its feet as bond yields moved from around 6.6 per cent a year ago, to about 7.6 per cent now, amidst a lot of uncertainty. The fund benefited by cutting down its long-term government bond holdings and moving to corporate debt over the last few months. Thanks to these strategies, the fund has outperformed its category average by 2-4 percentage points over one-, three- and five-year periods. In these timeframes, the fund has bettered the returns of HDFC Prudence as well.
Portfolio choices
With valuations of many mid- and small-cap stocks soaring, the fund has brought down its holdings in this space in recent times.
In its latest portfolio, the fund holds only about 11 per cent of its equity holdings in these stocks.
The banking sector is usually the top choice. It holds about 20 per cent in this space currently, predominantly in private banks such as HDFC Bank, ICICI Bank, Axis Bank and IndusInd Bank.
Construction projects, software and consumer non-durables are the other top sectors.
On the debt side, NCDs are on top, with 15 per cent allocation, sharply up from 6 per cent a year ago.
The fund generally plays it safe, going predominantly for AAA and AA rated instruments. The current portfolio includes AAA rated instruments of companies such as HDFC, Rural Electrification Corporation and Power Finance Corporation. AA rated instruments include that of Hindalco, Tata Motors Finance, and L& T Finance.
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