A new & accessible benchmark for balanced mutual funds

Choosing an appropriate benchmark for balanced mutual funds has always been a problem for the retail investor. In this post, I propose a new and more importantly accessible benchmark for equity-oriented balanced mutual funds - ones that do not use arbitrage opportunities or derivatives.

As always, I make no claim about the superiority of my choices. I am happy to change the index constituents if you can point out reasons for the same in the comments section.

Many, if not most balanced funds are benchmarked to the CRISIL composite indices. These are unbelievably expensive (few lakhs per year) are not available in the public domain (duh!). For example, the constituents of Crisil Balanced Fund Aggressive Index which can be used for equity-oriented funds (no arbitrage)  are explained in this post: CRISIL Balanced Index: a benchmark for balanced mutual funds.

Valueresearch has its VR Balanced index. This I assume is some kind of weighted average of funds in the Hybrid: equity-oriented category. However, this category is a joke. It is a mix of conventional balanced funds, the new equity Savings funds and funds that dynamic change asset allocation. Excuse me for not taking the star ratings of such an inhomogeneous category seriously. The VR balanced index is not available in public domain and cannot be used at will. Morningstar also has two similar indices - moderate and aggressive.

The S&P BSE Balanced Index(aggressive)

I would like to create a derived index with the above name from two of S&P BSE indices:

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.

balanced-fund-index

In my opinion, a benchmark should not be easy to beat! Using NIFTY TRI,  BSE 100 TRI, BSE 200 TRI instead of the BSE Allcap TRI resulted in lower returns (based on past performance, much of which is backtested). The quantum of outperformance when compared with popular balanced funds was the lowest for the Allcap+bond index.

Here is how the balanced index fared against a few balanced funds. I shall include all balanced funds in this months return listings.

balanced-funds-returns-comparison

Note: I have taken the two indices mentioned above and created the balanced index by taking 70% of Allcap and 30% of India Bond index on each business day. That the rebalancing is done daily. This is way too often. Typically the rebalancing is done only once a month. But for this the the price movement of all the stocks and bonds is the index is needed.

S&P BSE Balanced Index is a name coined by me because it is derived from two of their indices. This has nothing to do with S&P or BSE. If in future they come up with their such index, I shall be happy to discard this.

Do let me know your thoughts and better ways of building an index for balanced funds.

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10 thoughts on “A new & accessible benchmark for balanced mutual funds

  1. Rudra Ramya Sree

    Hi.
    Thanks for sharing information.presently stock market awareness in public is growing .people coming out to invest in stock markets,Forex,other financial investment.you article is very useful to have knowledge on Indian mutual funds.

    Reply
  2. Jeethendra A

    My one cent. I believe that the whole idea of choosing the balanced fund is to have less volatility and not just more returns. Considering that people want to have peace of mind, it should be a large cap + debt. I still believe the benchmark fund should consist of Nifty or Nifty Next only.

    Reply
  3. Sundararajan Srinivasan

    Hi Pattu:

    Good work. It sounds most logical to have 70:30 split between EQ:DT and doing it - At least this should be a good benchmark for Equity based balanced funds (i.e. those that have 65%+ Eq).

    Can't fathom why people would want to create closed benchmarks!

    Just a question - How much of a difference the Allcap Index makes vis-a-vis BSE 200 TRI. My gut judgement is that over 95% of the market cap is there within that... so does that or Allcap make a significant difference?

    Hopefully there will be a day, when SEBI mandates that the MF should benchmark against openly defined benchmarks! Then we could see an Index like yours come in.

    Reply
    1. freefincal

      Nice point! You are right. BSE 200 is good enough. Just that BSE Allcap returns are a touch higher and I wanted to make a tougher benchmark. I agree that only open source benchmarks should be used.

      Reply
  4. Ravi Kiran

    I am eagerly looking forward for this bench mark to compare my selection of Balanced fund. Your spread of 70 (LC)+15(MC)+15 (SV) break up of equity portion is inline with the allocation of most of the balancedd find with good track record.

    Reply
  5. JigDaherawala

    Dear,
    I have decided my asset allocation 70 and 30 debt. Which should be the type of fund for long ( 10 plus yr ) investment for this 30 % debt. i think it is certainly not the balance fund, am i right?

    Equity part i understand little and still work around with LC MC or flexicap but debt part i am totally confused due to many category like short term long term debt, bond and liquid fund and so on.
    I dont invest in NPS PPF or any kind of of such instrument except NRE FD.
    please help me to clear the query.
    thanks sir ji
    Jig

    Reply
    1. freefincal

      If you use a single balanced fund, then it will approximately have 70:30. Alternatively you can consider short-term to medium-term debt funds.

      Reply
  6. J Srikanth

    Very Interesting. HDFC seems to top but for last 3 years, Would be interesting to find out why. Look at the Top and second funds and the distribution. Very interesting.

    Reply

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