Using Balanced Mutual Funds As The Core Equity Portfolio Holding

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

BSE Balanced vs VR Balanced 650x279 - Using Balanced Mutual Funds As The Core Equity Portfolio Holding

SIP returns BSE Balanced vs VR Balanced 650x328 - Using Balanced Mutual Funds As The Core Equity Portfolio Holding

Lump sum returns BSE Balanced vs VR Balanced 650x328 - Using Balanced Mutual Funds As The Core Equity Portfolio Holding

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 VR Balanced 650x336 - Using Balanced Mutual Funds As The Core Equity Portfolio Holding

Data Balanced Funds vs VR Balanced 650x118 - Using Balanced Mutual Funds As The Core Equity Portfolio Holding

Balanced Funds Vs BSE Balanced Index

Balanced Funds vs BSE Balanced 650x336 - Using Balanced Mutual Funds As The Core Equity Portfolio Holding

Data Balanced Funds vs BSE Balanced 650x118 - Using Balanced Mutual Funds As The Core Equity Portfolio Holding

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 funds 9Y 650x290 - Using Balanced Mutual Funds As The Core Equity Portfolio Holding

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

Balanced funds 5Y 650x290 - Using Balanced Mutual Funds As The Core Equity Portfolio Holding

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.

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.

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8 thoughts on “Using Balanced Mutual Funds As The Core Equity Portfolio Holding

  1. Pattu , For Long term holding say 10 plus years and larger capital say eg 10 plus Lac can one invest in more than 1 balanced fund to spread out the risk , For eg a random comparing ICICI Pru Balanced Fund with HDFC Balanced fund via portfolio comparision tool shows the percentage of over lap in stock is ~ 24 % while similar comparision with SBI BF verus ICICI & HDFC shows ~ 20 % over lap stock. Thanks

  2. If there is one balanced fund that does justice to balanced fund category, it is Mirae Asset prudence fund. It charges only 0.68% and has given 25% returns in the past year. Its a newbie launched in 2015.

  3. Investing in balanced fund in SIP works really well especially in a less volatile market. In addition, one can invest in regular equity funds when the markets starts going down and there is fear hence maximising the returns.

  4. Excellent post!!

    For a person who prefers a minimalist approach, a good balanced fund could be the best choice. However, everyone should take a shot at alpha returns in their portfolios…for which…a small cap fund is a good option..

  5. Hi Pattu sir, great article. What I think should be important about Balanced Funds is that they periodically book profit which hedges against a market downturn. I may be mistaken but unless one books profit all gains are ephemeral. So would you know any fund which does this? Books profit when it thinks market is overvalued and reinvests when valuation is fair? Or do they all do so.

  6. “15Y+ investment duration: 60-70% balanced equity portfolio + 40-30% fixed income (initial allocation to be varied down the line)”

    Which fixed income investments do you suggest?

Do let us know what you think about the article