Balanced Funds: A good asset allocation in volatile markets

India Infoline News Service | Mumbai |

CRISIL Mutual Fund Rankings for quarter ended June 2013 released

Indian fixed income markets were impacted, in the recent weeks, by the series of liquidity tightening measures by the Reserve Bank of India to strengthen the Rupee.

With debt markets turning volatile after a steady run over the past year, investors are in a dilemma over their allocation in key asset classes, viz., equity and debt. Balanced Mutual Funds offer a simple solution to this dilemma as they invest 65-80% into equity and the balance in debt instruments. Equity has the potential to deliver superior long term returns while debt provides stability to the portfolio. This diversification protects the portfolio from downside risks if either equity or debt enters a bearish phase.

CRISIL’s study reveals that balanced funds (measured by the CRISIL – AMFI Balanced Fund Performance Index) have outperformed the CNX Nifty (equity markets) across 3, 5, 7 and 10 year timeframes (Table 1). Balanced funds also witnessed lower capital erosion when equity markets declined and enabled investors to capitalize from gains in equity markets by delivering returns higher or similar to those of the CNX Nifty (equity markets) (Table 2).

Balanced funds were also less volatile (a measure of risk) with 17% annualised volatility over a 5-year period compared to almost 25% for the CNX Nifty.

It is important for investors to look at an asset allocation approach; however the way it is executed is also equally important. Investors often tend to re-allocate assets based on market sentiments which may not be in their best interest. In comparison, balanced funds follow a well-defined asset allocation approach that offers a higher degree of protection on the downside but preserves much of the upside thereby serving investors well. Investors may choose top ranked balanced funds from the CRISIL Mutual Fund Ranking before investing.

The latest CRISIL Mutual Fund Ranking released for June 2013 reveals that UTI Mutual Fund led the tally of top ranked funds for the quarter with nine funds under CRISIL Mutual Fund Rank 1; Birla Sun Life Mutual Fund followed with six top ranked funds and IDFC Mutual Fund with five top ranked funds. The latest CRISIL Mutual Fund Ranking covers over 90% of the industry’s average assets under management (AUM) of the open ended schemes as of June 2013.

A unique feature of the CRISIL Mutual Fund Ranking is that unlike many other ranking models that are purely based on returns or net asset value (NAV), it uses a combination of NAV and portfolio-based attributes for evaluation. CRISIL’s fund ranking framework provides a comprehensive analysis of mutual funds, taking into consideration all factors, such as risk, returns, asset concentration, liquidity, asset quality and asset size. The rankings also include categories that focus specifically on long-term consistency in performance.

The ranks are assigned on a scale of 1 to 5, with CRISIL Fund Rank 1 indicating ‘very good performance’. In any peer group, the top 10 percentile of funds are ranked CRISIL Fund Rank 1 and the next 20 percentile are ranked CRISIL Fund Rank 2.


Table 1 - Performance of Balanced Funds
Index 3 Years % 5 Years % 7 Years % 10 Years %
CRISIL-AMFI Balanced Fund Performance Index 4.41 11.94 11.61 18.6
CNX Nifty Index 3.22 7.66 9.33 17.88
Performance as on June 28, 2013
Returns are annualised
 
Table 2 - Performance in bull and bear market phases
Period From Date To Date CRISIL – AMFI Balance Fund Performance Index CNX NIFTY Index
Sub-prime crisis 01-Jan-08 31-Mar-09 -35.93% -43.42%
Sharp bounce back post Sub-prime crisis 01-Apr-09 31-Dec-10 51.67% 48.77%
European Crisis 01-Jan-11 28-Jun-13 0.95% -1.94%
Returns are annualised
 


 

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