Equity/bond markets affect balanced funds

The flagging equity markets and an equally waning bond markets in August saw returns given by balanced funds declining to levels as low as -0.47 per cent.

Balanced funds are generally meant for a class of investors who are risk averse. Such investors look to garner big returns from equities, while relying on the safety net provided by debt.

While there is no doubt that balanced funds have given decent returns over a period of time, they have failed to maintain their good performance in August.

This category of funds uses a balance of equity and debt investments to act as a hedge in the event of a downturn in either of the markets. Quite surprisingly then, these funds have fallen more than equity diversified funds last month.

Escorts Balanced Fund, ranked as number one in August (mixed asset category) by Lipper gave returns of 2.55 per cent during the period. However, the one-year returns are still good at 32.18 per cent. Similarly, HDFC Balanced Fund features among the bottom 10 balanced funds, with negative returns of 2.39 per cent.

The benchmark Sensex fell by nearly 13 per cent from its all time high during last month, but recovered to close the month with a loss of only 1.49 per cent. The major pressure came in from debt. Pure debt schemes saw redemptions worth Rs 24,000 crore.

As debt forms a major chunk of some of the balanced funds, their returns have been hurt. Pure equity funds hardly managed to outperform BSE Sensex.

Lipper's equity India category gave returns of -1.35 per cent against -1.49 per cent delivered by BSE Sensex. Equity oriented balanced funds have thus suffered more compared with debt oriented funds.

Four of the top ten funds from mixed asset segment in August were arbitrage/derivative funds, which are positioned to outperform in the event of a market correction. Even in a falling market, the equity diversified category performed pretty well, giving returns of 4.43 per cent.

Ved Prakash Chaturvedi, managing director of Tata Mutual Fund, said, "Since the stock markets as well as debt markets have been quite choppy this season, the returns of these funds have eroded but the long term performance is always above average. Once the market stabilises, these funds will be back in action".

Tata's Balanced Fund has given returns of 0.01 per cent in the last one month.

Funds such as HDFC Prudence, Franklin Templeton Balanced and Birla Sunlife Balanced have given negative returns. With the bond yields rising in August, funds investing in bonds delivered a lacklustre performance. Bond INR general and Bond INR government gave returns of 0.41 per cent and 0.26 per cent respectively in August.

Nilesh Shah, deputy managing director, ICICI Prudential Mutual Fund, said, "I am sure that as equity markets post positive returns, the balance funds as category will also follow suit. The hybrid funds' mandate is to generate conservative returns. These funds achieve this by parking 65 per cent to 80 per cent in equities. In a month when equity markets have been down, hybrid funds have given negative returns. ICICI Prudential has an innovative hybrid product called Wealth Optimizer Plan.