Using Balanced Mutual Funds As The Core Equity Portfolio Holding

Published: May 11, 2017 at 9:42 am

Last Updated on

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)

 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.

Join our 1500+ Facebook Group on Portfolio Management! Losing sleep over the market crash? Don't! You can now reduce fear, doubt and uncertainty while investing for your financial goals! Sign up for our lectures on goal-based portfolio management and join our exclusive Facebook Community. The 1st lecture is free! Did you miss out on the lockdown discount? You can still avail it! Follow instructions in the above link!

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 of 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 Aggressive (!): 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. For example, 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.

Do share if you found this useful
Share your thoughts on this topic at the  Reddit freefincal_user_forum

Reach your financial goals like a pro! Join our 1600+ Facebook Group on Portfolio Management! You can now reduce fear, doubt and uncertainty while investing for your financial goals! Sign up for our lectures on goal-based portfolio management and join our exclusive Facebook Community. The 1st lecture is free!
Want to check if the market is overvalued or undervalued? Use our market valuation tool (will work with any index!) or you buy the new Tactical Buy/Sell timing tool!
About the Author Pattabiraman editor freefincalM. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. since Aug 2006. Connect with him via Twitter or Linkedin Pattabiraman has co-authored two print-books, You can be rich too with goal-based investing (CNBC TV18) and Gamechanger and seven other free e-books on various topics of money management. He is a patron and co-founder of “Fee-only India” an organisation to promote unbiased, commission-free investment advice. He conducts free money management sessions for corporates and associations on the basis of money management. Previous engagements include World Bank, RBI, BHEL, Asian Paints, Cognizant, Madras Atomic Power Station, Honeywell, Tamil Nadu Investors Association. For speaking engagements write to pattu [at] freefincal [dot] com
About freefincal & its content policy Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on developments in mutual funds, stocks, investing, retirement and personal finance. We do so without conflict of interest and bias. We operate in a non-profit manner. All revenue is used only for expenses and for the future growth of the site. Follow us on Google News Freefincal serves more than one million readers a year (2.5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified from credible and knowledgeable sources before publication. Freefincal does not publish any kind of paid articles, promotions or PR, satire or opinions without data. All opinions presented will only be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
Our publications

You Can Be Rich Too with Goal-Based Investing

You can be rich too with goal based investingPublished by CNBC TV18, this book is meant to help you ask the right questions, seek the right answers and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now. It is also available in Kindle format.
Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want Gamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you wantThis book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at low cost! Get it or gift it to a young earner

Your Ultimate Guide to Travel

Travel-Training-Kit-Cover-new This is a deep dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, how travelling slowly is better financially and psychologically with links to the web pages and hand-holding at every step. Get the pdf for Rs 199 (instant download)
Free android apps