The devil is in the detail.
Recently, we wrote about how balanced funds are a good option for steady returns. Indeed, balanced fund with in-built asset allocation tend to navigate the volatile market well. But the proof of pudding is in eating. Hence, we try to look at risk and return characteristics of decent balanced funds and compare them with large cap equity funds.
The analysis should ideally be done using category index values. However, we don’t have the data. Hence, we have done the case study using data for few funds which are well known and have relatively longer track record.
For our analysis, we have used HDFC Top 200 fund, HDFC balanced funds, Birla Sunlife Frontline equity fund and Birla Sun life Balanced 95 fund. I have used the data available from AMFI. The following discussion is just for information purpose.
In this article, we try to find answers to few questions:
- What type of return balanced funds deliver and how volatile are returns?
- Are balanced funds good in managing downside?
- Do balanced fund capture major portion of the upside when markets rise?
- Do balanced funds underperform large cap equity funds most of the time?
What type of return balanced funds deliver and how volatile are returns?
We notice that while average 1-year return is quite similar, 1-year volatility of the return is substantially low for balanced funds. This means that NAV fluctuates far less in the case of balanced funds compared to equity funds.
Do balanced funds fall less than equity funds during market corrections?
In the charts below, I have shown the peak-to-trough decline during the calendar year. We notice that balanced funds fall less than the equity funds. The average fall in HDFC balanced fund was ~67% of the fall in HDFC Top 200 fund while the same was at 77% for BSL balanced 95 fund.
Are balanced funds able to capture the upside during bull phases of the market
In the below chart, I show the rise in fund NAV from the trough during the calendar year. Clearly, in last few years, balanced funds have captured much of the upside. The gap in performance of pure equity and balanced funds in large during sharp market recovery (2009) or extremely bullish phase of the market (2007). One should expect balanced funds to underperform equity fund during extremely bullish market environment or market rally after a share sell-off. In normal, market scenario, balanced funds are capable of capturing large portion of the equity market upside.
Do balanced funds underperform large cap equity funds most of the time?
Given that balanced funds can have 0-35% allocation to debt securities, it is reasonable to expect balanced funds to underperform equity funds most of the time. Our analysis suggests that balance funds outperform equity funds half of the time. In the below chart, we plot rolling 1 year differential of the performance of equity fund and balanced fund. One a rolling 1-year basis, it appears that balanced funds have mostly outperformed the equity funds in recent past.
We believe that balanced funds are good option for conservative investors who look steady returns with less volatility. The in-built asset allocation helps balanced funds in delivering better risk adjusted return.
Finally, to conclude:
- Balanced funds deliver return that is similar to equity funds but are less volatile and hence deliver better risk adjusted return.
- Balanced funds are good at protecting the downside. During period of deep market correction, balanced funds can protect portfolio.
- In the normally rising market, balanced funds are able to capture large portion of the upside. However, during bull phases and market rally after sharp correction, balanced funds can underperform equity funds.
- Despite having lower equity allocation, balanced funds do not underperform equity funds most of the time.
Disclaimer: The above content is just for information and should not be construed as an offer to buy or sell or recommendation. Contact your financial advisor for guidance on any investment related query.
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