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Why you must invest in a balanced fund
Value Research
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August 22, 2005

Does the fear of losing your money stop you from investing in the stock market?

Then a mutual fund is your best bet.

No, we are not talking of diversified equity mutual funds. These are funds that invest in the shares of various companies in various sectors.

Neither are we telling you to totally bypass the stock market by investing in debt funds, which invest in fixed-return instruments like bonds.

What we would recommend in this case is balanced funds.

Why?

By investing in both shares and fixed-return investments, balanced funds seek the best of both worlds.

They include the power of equities (shares) and the stability of debt market instruments (fixed return investments like bonds) and are most likely to take you to your goal safely.

They are the best hope for those who want to benefit from the stock market but don't have the stomach for volatility.

We believe all sorts of investors should have at least some portion of their investments in balanced funds.

What makes balanced funds such a power investment tool is their inherent design, which allows them to maintain an effective balance between debt and equity.

To understand risk better, read How risky is your mutual fund.

Performance

Balanced funds have concentrated more on equity in recent times and the reward has been substantial.

On an average, balanced funds have gained 43.58% in the last one year.

Among the top gainers, Magnum Balanced has given a return 71.01% and has outperformed the average returns of a diversified equity fund (average of a diversified equity fund: 67.37%).

Kotak Balance (59.81%), HDFC [Get Quote] Prudence (59.73%)  and BoB Balanced (57.92%) too have done well.

The laggards have not done bad either, with the worst performing LICMF ULSI gaining 25.14%.

Know where your money is going

If the fund manager plays his cards right, returns follow. However, getting the balance right is tricky. That is why your fund managers' ability becomes all the more crucial.

An average balanced fund maintains a 60:40 equity debt ratio. That means 60% of their total investment is in equity and the balance in debt.

But, in a booming market (like the current bull run we are facing now), funds cross this 60% limit in the search of higher returns. And, if the fund manager makes a few wrong investments, the fund's returns may go for a toss.

The debt market is not doing too well right now, so most funds have been making optimum use of their equity component to earn returns. In the past year, most of the top performers in this category have kept their debt allocation below 30%.

Take BoB Balance, for instance. The fund has a one-year return of 57.92% but has got it by completely ignoring the debt market for the last four months. Of all the money the fund manages, 60.79% is in shares and 39.21% is in cash (as of investments declared on June 30, 2005).

Magnum Balanced has kept half of its equity investments in mid-cap and small-cap stocks in the last year.

HDFC Prudence, BoB Balance and Kotak Balance too have huge amounts invested in these kinds of stocks.

While mid-caps and small-caps are riskier than large-caps, the returns they have provided are much higher. A majority of the below average balanced fund performers have not done well simply because they have stuck to their large-cap holdings.

A good investment to consider

Balanced funds have proved their worth time and again and rewarded investors with superlative returns and stability.

The returns may not be as flashy as diversified equity funds, but balanced funds are the ultimate vehicle for long-term growth for conservative investors.

They will save you from bumpy rides and ensure a soft landing.

The figures for all the one-year returns mentioned above are as of August 19, 2005.

Tomorrow: 5 best balanced funds


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