Principal Balanced: Balancing safety and spice

After the strong rally in the first half of the year, Indian equities have been a bit choppy over the past few weeks.

If you are looking for investment options to weather market volatility better while achieving capital appreciation in the long term to meet your financial goals, then balanced funds fit the bill.

The flexibility to juggle debt and equity instruments based on market conditions makes these funds nimble and stay afloat even during tough times. Principal Balanced Fund, though not a chart-topper, has still managed to deliver top quartile performance across one-, three and five-year time-frames.

The outperformance of the fund vis-à-vis other funds in the category has improved significantly over the last few months. For instance, over the past year, the fund has delivered over 24 per cent return, higher than the 16 per cent gain clocked by S&P BSE Sensex during the same period. This is despite the fund holding about 25 per cent of its assets in debt instruments such as NCDs, G-Secs and Commercial Papers over the same period.

Over the past six months, the fund has been gradually increasing exposure to debt, which should help it contain downsides better if the stock market corrects. Besides the adept moves across asset classes, the fund was quick enough to reduce exposure to underperforming themes such as IT and pharma. For instance, the fund reduced exposure to technology companies to 2.9 per cent in June 2017 from 8.5 per cent in December 2015, before increasing it to 6.2 per cent by end-September 2017.

Likewise, the fund has more-than-halved its holding in pharma stocks to 3.1 per cent as of end September 2017 from 6.5 per cent in December 2016.

It has also increased exposure to themes that have done well over the past year such as metals and mining, and this has also aided performance.

Besides asset allocation and sectoral shifts, the fund’s stock choices also played a role in its top quartile performance. Identifying multibagger stocks such as Philips Carbon Black, Rain Industries, HEG, Uflex and DCM Shriram early on has boosted the scheme’s performance over the last 18 months.

The fund has managed good performance despite its high expense ratio of 2.7 per cent, compared to peers such as HDFC Balanced Fund (1.96 per cent) and L&T India Prudence (2 per cent).

The fund held 64 stocks in its portfolio as of September 2017 with the top holding HDFC Bank accounting for 2.6 per cent of the scheme assets.

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