ATM :: Balanced funds emerge good bets in volatile markets

M Allirajan, TNN | Aug 6, 2013, 06.37AM IST | Time of India


Balanced funds, which invest in a combination of equity and debt instruments, have emerged as a good bet in volatile markets. The Crisil-Amfi balanced fund performance index has outperformed the Nifty over the three, five and 10-year time frame.

Balanced funds also witnessed lower capital erosion when equity markets declined and enabled investors to capitalise on gains by delivering returns higher or similar to those of the Nifty. These funds were also less volatile and had annualised volatility of 17% over a five-year period compared to almost 25% for the Nifty.

While equity investments have the potential to deliver superior long-term returns, debt instruments provide stability to the portfolio. “This diversification protects the portfolio from downside risks if either equity or debt enters abearish phase,” analysts at Crisil said.

The Crisil-Amfi balanced fund index declined 35.9% during the subprime crisis between January 2008 and March 2009. The Nifty fell 43.4% during the period. Similarly, they gained at a faster pace during the bounce-back that followed the sub-prime crisis. Balanced funds surged 51.7% between April 2009 and December 2010 compared to the 48.8% gains made by the Nifty.

These funds have also managed to hold their ground when markets started their losing streak in the aftermath of the crisis in Euro-zone countries. Balanced funds managed to stay in the green during the period.

Though it is important for investors to look at an asset allocation approach, the way it is executed is also equally important, analysts said. “Investors often tend to re-allocate assets based on market sentiments which may not be in their best interest,” they said.

In contrast, balanced funds, which invest 65%-80 % into equity and the balance in debt instruments, follow a well-defined asset allocation approach that offers a higher degree of protection on the downside but preserves much of the upside thereby serving investors well, analysts said.

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