Sanat Vallikappen

Mumbai: The bulldozer that flattened equity markets in the last four months has made it clear that riding the bull is not always the best strategy to employ in the market.

Notwithstanding what market pundits may have said about the long-term potential of equity, it might be prudent to give yourself some headroom to manoeuvre when their predictions go awry, as has happened time and time again.

One way of making sure you don’t miss out on equity’s returns, while protecting your investment from severe downturns in the market, is to invest in balanced funds.

As the name suggests, these funds invest in a mix of equity and fixed income, thus providing an investor with assetclass diversification in one product.

The diversification ensures these funds manage downturns in the stock market much better than an all-equity fund. But, on the flipside, their returns in a bull market will be less than those for an all-stock fund.

A comparison of existing balanced funds and equity diversified funds suggests that over the past one year, you may have been better off investing in balanced funds rather than equity diversified funds.

Though a number of equity diversified funds have outperformed the Sensex (which has delivered a one-year return of 24.62%), the average one-year return of all 168 diversified equity funds compared, works out to 21.36%.

In that context, the average one-year return of 20.45% delivered by the 24 balanced funds is extraordinary; the more because investors have got nearly similar returns without having to grapple with the intense volatility.

But, one could always argue that averages skew the real picture.

In that case, let us compare the best equity diversified fund with the best balanced fund. DWS Investment Opportunity Fund, the best performer in the equity category, has returned 55.07% over a oneyear period, while Franklin India Balanced Fund, the best in the balanced fund category, has given 49.86%. The slightly lower return for the balanced fund isn’t a bad trade-off at all, given the lower risk.

But then, the bull market since April 2003 skews returns in favour of equity diversified funds if the categories are compared over longer periods.

While equity diversified funds have given annualised returns of 35.83% over a three-year period, balanced funds have yielded 27.38%. Pitting the best in each category against each other, DSP Merrill Lynch Tiger Fund, the best equity fund over a three-year period, has delivered compounded annualised returns of 47.83% as opposed to 36.36% for Franklin India Balanced Fund, the best among the balanced funds.

All the same, periods of equity meltdown underscore the importance of a mix of equity and debt. Taking the year-todate as one of the worst periods for Indian equity, equity diversified funds have lost an average 22.7%, while balanced funds have lost 16.16%. Compared with the benchmark returns, the latter seems to better mirror the Sensex loss of 14.79% over the period.

Source : DNA