It is no secret that I am a fan of equity-oriented balanced mutual funds. They are a low risk, high reward option and it is a no brainer that one should consider using them*. In this post, I discuss why it makes sense to use them as the core holding in an equity portfolio. I also compare the performance of balanced funds with two benchmarks - the one used by Value Research (VR Balanced Index) and the other by me (BSE Balanced index)
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* Balanced funds are often recommended as the first fund for newbies. While I don't disagree, it is important to recognise that they still contain about 70% equity. And 70% equity is only a touch less volatile than any old diversified equity fund. So it is important not give them or ourselves false hope. When the shit hits the fan a -25% return is going hurt just as much as a -40% return.
Next, let me thank my friend (let us call him geek) who helped me run parts of this analysis.
CRISIL Balanced Index
Most balanced funds use the CRISIL Balanced Index. This costs about 11 lakh a year (yes, that is right). Since this is not public information, one cannot use it for analysis. I think SEBI should mandate the use of publically accessible benchmarks. Anyways, more about this here: CRISIL Balanced Index: a benchmark for balanced mutual funds
VR Balanced Index
Value Research used VR Balanced Index for its hybrid: equity-oriented category. I can't find what this is made up of anywhere. I assume that this is some kind of weighted average of all the funds in the category.
The category includes balanced funds (stocks+ bonds ) and the new equity savings funds (arbitrage + bonds). If VR balanced contains both types of NAVs then it is an apples + oranges index and should not be taken seriously.
BSE Balanced Index
This is my own concoction because I wanted an accessible benchmark for balanced mutual funds
70% of S&P BSE AllCap Index(total returns index) and
30% of S&P BSE India Bond Index.
The BSE Allcap index has about 70% large cap allocation, 15% mid-cap and 15% small-cap. This I believe represents a typical portfolio alignment of most equity-oriented balanced funds. The 70% allocation to this equity index also reflects the typical asset allocation of such funds.
The BSE Indian Bond Index is a composite bond index that consists of both government and corporate bonds with a maturity duration that is neither too small or nor too long. I think this is a suitable candidate for the fixed income portfolio.
The 70:30 allocation is maintained daily. This is impractical but I wanted something that has this mix at all times. Balanced funds reset the portfolio each month. So free of exit loads and taxes, the investors gets the benefit of rebalancing. This is one of the key reasons for their success - more on this in the coming days.
VR Balanced vs BSE Balanced
Obviously, the BSE Balanced index should be tougher to beat than VR Balanced. This is of course, fortuitous.
Balanced Funds Vs VR Balanced Index
Balanced Funds Vs BSE Balanced Index
From the above four graphs, it is clear that BSE balanced is indeed tougher for Balanced funds to beat. You can consult the monthly fund screeners to check for performance consistency and returns for all equity fund categories and their benchmarks.
Now, let us get to what the title talks about.
Balanced funds vs Other Categories 9-year SIP Returns
Balanced = equity oriented balanced funds
EQ-LC = large cap funds
EQ-MC = mid cap funds
EQ-MLC = multi-cap funds
ES-SC = small-cap funds
EQ-TP = Tax planning or ELSS funds
Balanced funds vs Other Categories 5 year SIP Returns
Observe the entries in the dotted rectangle. The width of the rectangle represents the range of 5Y and 9Y SIP returns of balanced funds.
The balanced funds are on the left. Now pan across the length of the rectangle from left to right.
Balanced funds have given a return comparable to most large-cap, multi-cap and ELSS funds.
For the observed period (not a law of nature), mid-cap and small-cap funds tower outside the rectangle.
Therefore, why not use a balanced fund instead large-caps, multi-cap or ELSS funds (you don't need them anyway for saving tax)?
Then we could consider equity portfolios of the following form.
Balanced Equity Portfolios
Conservative: 100% balanced fund
Moderately Aggresive (!): 70% Balanced + 30% mid-caps or
70% balanced + 15% mid-cap + 15% small-cap funds
Aggressive: 50% Balanced + rest mid and small caps in different proportions.
In other words, the balanced fund is treated as 100% equity and the core equity portfolio holding.
Please note the total portfolio will have fixed income separately.
15Y+ investment duration: 60-70% balanced equity portfolio + 40-30% fixed income (initial allocation to be varied down the line)
10Y investment duration: 40-50% balanced equity portfolio + 60-40% fixed income (initial allocation to be varied down the line)
5Y investment duration: 0-20% balanced equity portfolio + 100-80% fixed income (initial allocation to be varied down the line, if necessary).
My retirement and son's education equity portfolios have a balanced fund as the core. This was not a data driven choice but a temperament driven one. Now the data (fund + benchmark) is available to temper our choices.
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