Balanced funds still unbalanced!

Aabhas Pandya

It's a classic case of once bitten but never shy! Despite falling flat in lure of the ICE (infotech, communication and entertainment) candy earlier this year, balanced funds continue to be technology heavy. While some funds have seen a dip in their equity allocation compared to March 2000 portfolios, the exposure to technology stocks continues to be at almost same levels. Add to it, the cheaper valuation of technology stocks after a sharp correction earlier this year has driven some balanced funds to step up their ICE allocation.

While the average equity allocation has marginally come down from 66 per cent to 62 per cent as on August 31, technology exposure of balanced funds continues to be around 33 per cent. Thus, balanced funds are not very far behind diversified equity funds, which hold almost 40 per cent of their assets in technology stocks.

With portfolios skewed in favour of the volatile technology sector, there is a remote possibility that balanced funds will deliver "safety of investment with steady capital appreciation". For instance, balanced funds have again been mauled in the last week, when technology stocks led the fall on the bourses. The Value Research category of balanced funds has lost 6 per cent while the basket of diversified equity funds has lost marginally higher at 7.40 per cent between September 11 and September 18.

For instance, take Alliance '95. While the fund's equity exposure has gone up from 64 per cent on March 31 to 75 per cent on August 31, the weightage to ICE stocks has climbed up from 41 per cent to 51 per cent. Or consider, Zurich India Prudence, where the ICE exposure has moved up from 7.8 per cent to nearly 20 per cent in August.

Earlier this year, balanced funds had lost an average 34.47 per cent in over two months (between March 7 and May 24), which was a drastic fall by any stretch of imagination. In fact, in some cases, balanced funds had dropped nearly as much as equity funds under the same AMC.

While most of the balanced funds continue to be invested in equities as per the stated band, the question is whether fund managers can afford to hold concentrated sectoral bets in the equity component? Most of the fund managers have been blinded in their pursuit of stocks from the ICE sector, replicating stocks across funds while conveniently forgetting the stated investment objective and the investor profile. The flexible investment pattern (the fund could have 51-80 per cent in equities) has only come in handy.

Investors in balanced funds are a different class, who have graduated from debt or monthly income plans to these funds for better returns but their primary concern still continues to be safety of principal. Last year saw investors pour around Rs 10 billion in balanced funds as interest rates took a beating and AMCs went on a selling binge, driving home the virtues of a balanced portfolio. Looks like these AMCs will again have to do a lot of explaining to their balanced fund investor.

ICE ALLOCATION IN BALANCED FUNDS

Fund	March 2000 (%)	August 2000 (%)
Alliance '95	41.45	51.30
Birla Balance	50.89	42.60
DSPML Balanced	26.35	31.64
JM Balanced-G	29.78	21.29
K Balance Unit Scheme '99	31.00	23.29
Kothari Pioneer Balanced	33.30	26.43
Magnum Balanced	56.41	41.41
Prudential ICICI Balanced	35.89	34.24
Sun F&C Balanced	34.24	31.52
Zurich India Prudence	7.80	19.30

Source: Value Research

Money

Fund News

Tell us what you think of this report