Here is a comparison of Top 5 Balanced Mutual Funds 2016:
Balanced Mutual Funds, also known as Hybrid Funds, are those funds which invest in both equity and debt instruments. Balanced funds may be equity-oriented or debt-oriented. For a balanced fund to qualify as Equity Oriented Balanced Fund, the fund needs to have equity exposure of at least 65% whereas remaining allocation would be made in the debt instruments. Conversely, those balanced funds which have debt exposure of more than 65% and remaining exposure in equity are known as Debt Oriented Balanced Funds. Under equity exposure, the fund invests in shares of companies in finance, healthcare, engineering, chemicals, FMCG, automobiles, construction, technology, etc. Under debt exposure, the fund invests in commercial paper, government securities, bonds, debentures, certificate of deposits, central government loan, etc.
Also read: Comparative Analysis of Top 5 ELSS Schemes 2016
Equity Oriented Balanced funds can be looked upon as a viable investment avenue for investors who have a moderate risk profile and an investment horizon of 4-5 years. The equity component enhances the wealth accumulation capability while the debt component lessens fund volatility and delivers steady interest income. Usually the balanced fund managers, after allocating towards debt and equity, employ the rest in money market instruments as well. So, the investor’s money gets exposure to varied asset classes under a single umbrella, and he gets freed from the woes of asset allocation and re-balancing. Moreover, these are tax-efficient instruments in the sense that long-term capital gains from equity-oriented balanced funds are tax-free in the hands of the investor. However, short-term capital gains, i.e. sale of units before completion of 1 year, would be taxable at the rate of 15% plus surcharge and other cesses (as applicable). These are less volatile as compared to diversified equity funds but generate higher returns than pure debt funds.
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After gaining an insight into the merits of Equity Oriented Balanced Funds, you may be desirous of picking a few funds for investment. While deciding your pick, you should consider not only qualitative factors but also quantitative factors. Qualitative factors are composed of fund history and asset allocation. Quantitative factors consist of financial ratios and expense ratio.
The criteria used to shortlist the Equity Oriented Balanced Funds is given below along with rationale and lucid explanation to help you make sense of the data and figures:
– The plans considered for shortlisting are equity-oriented regular growth plans. Initially, funds were shortlisted based on qualitative factors and the funds thus arrived at were subject to quantitative analysis.
– Fund history is accounted for to be the first shortlisting criteria. Funds having a performance history of at least five years were chosen. You may consider funds which have an operational tenure longer than five years as well. To arrive at a fund that is resilient enough to face both the bullish and bearish phases, it is necessary to choose a fund with a substantial performance history.
– The asset allocation of the balanced fund was used to examine its suitability. Funds that were fundamentally composed of large-cap stocks as regards the equity component and had less interest rate sensitive debt component were preferred over funds that had made a higher allocation in mid-cap and small-cap stocks and highly interest-rate sensitive debt.
– 3-year and 5-year trailing returns were taken into account to prescribe a fund that presents the most suitable investment opportunity. A fund that delivers high absolute returns year-on-year would be preferred over an inferior performer.
– Asset under Management (AUM) shows the quantum of assets that the fund manager is managing at present. As a thumb rule, you may consider a fund house that has a substantial amount of AUM over its competitors so that your investment doesn’t suffer on account of redemption by a large number of investors.
– Expense Ratio indicates the operational efficiency of a particular fund. Lower expense ratio renders higher returns to the investor. Thus, balanced funds having a lower expense ratio were given preference over other funds having a higher expense ratio.
– Figures about Standard deviation (SD), Sharpe Ratio and Sortino ratio relate to the period of 5 years. Standard deviation is a measure of absolute volatility wherein the tendency of the funds to deviate from average returns in either of the directions is analysed. Investors usually prefer stability in their returns and standard deviation can help them in gauging the ability of the fund to deliver consistently. Ideally, funds having lower standard deviation were preferred over those funds that measured higher on volatility aspect.
– Sharpe ratio measures the propensity of the fund to deliver risk-adjusted returns. Wisdom says that those funds represent ideal investment avenue which can provide higher returns on every additional unit of risk assumed by the investor. Consequently, balanced funds having higher Sharpe ratio were preferred over funds that fared average in providing risk-adjusted returns.
– Similarly, funds having higher Sortino ratios were chosen over funds with a lower Sortino ratio.
The following table shows the top 5 balanced funds selected after an in-depth analysis using the criteria mentioned above:
As per the fund history, Tata Balanced Fund, SBI Magnum and Birla Sunlife are the oldest balanced funds and L&T India Prudence Fund is the youngest of all. Tata Balanced Fund and Birla Sunlife Balanced 95 fund has been the most resilient fund of all that has given consistent performance in both bearish and bullish markets. Franklin India has stood up solidly in bear phases but could not outperform its peers during bull runs. SBI Magnum, on the other hand, remains a better performer in bullish markets than bearish periods. L&T has put up an impressive show since its launch but being the youngest fund; it needs to go through bear runs as well to prove its resilience.
On returns frontier, all the five funds have outperformed benchmark returns and category returns over the period of 3-year and 5-year. An inter-fund performance comparison reveals that Tata Balanced Fund has delivered the highest absolute returns consistently for both the 3-year and 5-year period. After that, Franklin has been second best performer in the 3-year tenure whereas SBI Magnum has been second best for the 5-year duration. So as an investor, you need to pick a fund that delivers not only high returns but also consistent returns.
Regarding expense ratio, Tata Balanced Fund looks a favourable investment haven which has scored above other funds as having the highest operating efficiency. It is so because Tata Balanced Fund has the lowest expense ratio of 2.44% as compared to other balanced funds. The next efficient fund among the balanced fund category is Birla Sunlife Balanced 95 Fund with expense ratio being 2.69%. The least efficient fund concerning expense management is the L&T India Prudence Fund with the highest expense ratio of 2.95%. You should not consider expense ratio as a standalone criterion towards the selection of balanced fund for investment, but in conjunction with other qualitative and quantitative parameters to obtain a holistic view.
As regards absolute volatility, SBI Magnum Balanced Fund and Franklin India Balanced Fund need consideration as these have the lowest standard deviation of 11.60 and 11.65 respectively, thus ensuring relatively stable returns. Although, Franklin India Balanced Fund may be unable to outperform the indices during bullish conditions, it will inevitably contain losses considerably during bearish conditions. Tata Balanced Fund has the highest standard deviation of 12.49 which makes it the most aggressive balanced fund among all the other funds. This kind of aggressive approach has enabled it to outperform the category and benchmark returns over several investment horizons. It also implies that on one hand it possesses the tendency to generate higher returns than other funds during bull runs but it you may also suffer greater losses than other funds during bear runs.
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A risk-adjusted return is an important criterion to bring about precision and relevance in investments. SBI Magnum Balanced Fund has the highest Sharpe and Sortino ratio of 1.09 & 1.88 respectively making it an ideal investment which gives you a relatively higher reward for assuming greater risk. Birla Sunlife balanced 95 fund has the lowest Sharpe and Sortino ratio of 0.92 & 1.66 making it an investment that does provide you returns conforming to the risk assumed.
Asset allocation requires due regard to ensure that your investments conform to your risk profile. Tata Balanced Fund, being a mid-cap tilted fund makes one-fourth of its equity allocation in cyclical funds, making its returns vulnerable to business cycles. L&T India Prudence Fund & SBI Magnum Balanced Fund are mostly composed of Mid-caps and small-caps as regards their equity exposure and corporate bonds as regards debt exposure making it a better Bull Run performer than a bear run performer. Franklin India Balanced Fund and Birla Sunlife Balanced 95 Fund are primarily composed of large caps on their equity exposure and government bonds on debt component and cash equivalents enabling it to contain losses during bear runs and give reasonable returns during bear runs.
Also read: SIP vs Lumpsum Investment
Final Words
Relatively high-risk seekers may opt for Tata Balanced Fund owing to its comparatively high volatility and high risk-adjusted returns. Moderate risk-seekers may try their hands on L&T India Prudence Fund & SBI Magnum Balanced Fund due to its below average risk and above average yields. Finally, relatively low-risk seekers may invest in Franklin India Balanced Fund and Birla Sunlife Balanced 95 Fund owing to their low risk-average returns.
Mutual Fund Investments are subject to market risks. Please consult your financial advisor before investing.
