Hdfc Balanced Fund: Is It A Smart Investment Choice?

HDFC Balanced Fund is a predominantly equity-based fund that seeks to generate capital appreciation with current income from a combined portfolio of equity and debt instruments. The fund typically maintains 60% exposure to equity instruments, with the balance allocated to debt instruments. While the fund has been recommended for new investors or conservative equity investors, it is important to note that balanced funds, including the HDFC Balanced Fund, are not suitable for lump-sum investments due to the risk of catching a market peak and facing sudden losses. Therefore, a cautious approach involves investing through SIPs and staggering investments over time to average out the purchase cost.

Lump sum vs staggered investments

When it comes to investing a lump sum of money, there are generally two approaches one can take: investing the full amount immediately, also known as lump sum investing, or spreading out the investment over time through regular, equal payments, known as dollar-cost averaging (DCA) or staggered investments.

Lump Sum Investing

Lump sum investing involves investing all your available money at once, regardless of the amount. This approach provides immediate full asset class exposure and can potentially outperform DCA even with a similar or lower-risk portfolio. For example, if you are worried about a market crash but want to be invested in stocks, you could consider a more conservative portfolio with a higher percentage of bonds.

Additionally, lump sum investing takes advantage of the fact that markets generally rise over time. Historically, markets have gone up 75% of the time and down 25% of the time. Therefore, by investing a lump sum, you increase the odds of buying in at lower average prices compared to DCA.

However, the main concern with lump sum investing is the fear of a market crash immediately after investing, which could result in significant losses. This fear may be especially pronounced when investing a large sum of money.

Dollar-Cost Averaging (DCA)

DCA involves investing your money over time through regular, equal payments. For example, if you have £240,000 to invest, you might invest £20,000 per month for 12 months. The perception is that DCA helps to 'diversify' the cost of entry into the market by purchasing shares at prices between the highs and lows of market fluctuations.

However, the problem with DCA is that if the market increases during your investment period, you will end up paying a higher price on average compared to investing all your money upfront. For DCA to be effective, the market would need to produce a negative return during your investment period, which is less likely given historical trends.

Additionally, DCA can result in a significant opportunity cost as your money is not working for you as effectively over time. Each day you wait to invest, inflation silently diminishes the value of your money, and you are more likely to miss out on potential growth.

When considering investing a lump sum in the HDFC Balanced Fund or any other investment vehicle, it is generally recommended to stagger your investments, especially for new or conservative investors. By investing over a few weeks or months, you can avoid catching the market at a higher level and average your purchase cost.

However, it is important to note that markets generally rise over time, and the odds are in favour of buying in at lower average prices through lump sum investing. Therefore, if you are investing for the long term and can tolerate the risk of short-term market fluctuations, lump sum investing may be a more effective strategy to maximise your returns.

Risk profile

When considering investing in the HDFC Balanced Fund, it is important to understand the associated risks. Balanced funds, including the HDFC Balanced Fund, are predominantly equity funds, with at least 65% of the underlying assets invested in equity to maintain the tax benefits of a mutual fund. In practice, many funds tend to have an even higher allocation to equity, ranging from 70% to 80%. As a result, balanced funds exhibit similar short-term volatility to equity funds.

The HDFC Balanced Fund, in particular, seeks to generate capital appreciation with current income from a combined portfolio of equity and debt instruments. Typically, the fund maintains a 60% exposure to equity instruments, with the remaining 40% allocated to debt instruments. This means that the fund's performance is closely tied to the stock market.

Investing in the HDFC Balanced Fund carries the risk of catching the market at a peak and facing sudden losses. The fund has experienced significant fluctuations in the past. For example, over a 60-month period from 2009 to 2013, it fell by at least 15.72% in 12 months and rose by 40.32% in 14 months. Therefore, it is recommended to stagger investments over time rather than investing a lump sum to avoid catching the market at a particular level.

The HDFC Balanced Fund is recommended for new investors or very conservative equity investors. If your risk profile aligns with this description, the fund could be a suitable option for you. However, it is important to remember that even conservative investors can experience sharp drops in their investments when the market falls. Therefore, diversification is essential to reducing risk and maximising returns.

HDFC vs ICICI Prudential Balanced Fund

When deciding between investing in the HDFC Balanced Fund or the ICICI Prudential Balanced Fund, it is important to note that both are open-ended balanced funds with more exposure to equity investments. However, they differ on various parameters, as outlined below.

Basics

Both funds belong to the Hybrid Balanced-Equity category. In terms of Fincash Ratings, ICICI Prudential Balanced Fund is rated 5-star, while HDFC Balanced Fund is rated 4-star. As of April 11, 2018, the net asset value (NAV) of the HDFC Balanced Fund was approximately INR 149, while the NAV of the ICICI Prudential Balanced Fund was approximately INR 127.

Performance

There is no significant difference in the performance of the two funds, although in many instances, the HDFC Balanced Fund leads in terms of compounded annual growth rate (CAGR) returns.

Yearly Performance

The absolute returns generated by the two funds vary, with one outperforming the other in different years.

Other Details

The assets under management (AUM) of the ICICI Prudential Balanced Fund is higher than that of the HDFC Balanced Fund. The minimum systematic investment plan (SIP) investment for the HDFC Balanced Fund is INR 500, while for the ICICI Prudential Balanced Fund, it is INR 1,000. The minimum lumpsum investment for both funds is the same, at INR 5,000.

Recommendations

Both funds are recommended for individuals seeking capital appreciation in the long term, along with a regular flow of income. Additionally, both funds are recommended for new investors or very conservative equity investors.

When deciding between the HDFC Balanced Fund and the ICICI Prudential Balanced Fund, it is important to consider your investment objectives and risk tolerance. Both funds have their strengths and differences, as outlined above, so be sure to review the information carefully before making a decision. Consulting a financial advisor can also help you make an informed choice.

Short-term volatility

Balanced funds are predominantly equity funds. To ensure that investors do not have to pay long-term capital gains tax, fund companies ensure that at least 65% of the underlying assets of the fund always stay invested in equity. In practice, many funds tend to be 70 to 80% in equity.

Given this, in terms of the short-term volatility they will face, balanced funds should be treated like equity funds. They can rise sharply during market rallies, and they can drop sharply when the markets fall. These rises and falls are less extreme than pure equity funds, but they are still quite severe. For example, over the 60 months from 2009 to 2013, HDFC Balanced Fund fell by at least 15.72% in 12 months, and rose by 40.32% in 14 months.

Therefore, these funds are not suited for lump-sum investments. With a lump-sum investment, there is a danger that you could invest at a market peak, and then face sudden losses. Obviously, the reverse could also happen. You could invest at a market bottom and quickly gain a lot of money, but there is no way of knowing.

Thus, the cautious approach is that investments must be made through SIP. Even if you have a lump sum available, you should split it into at least six monthly instalments. This will average out your purchase NAV.

SIPs

When considering investing in the HDFC Balanced Fund, it is important to understand the potential risks and benefits. HDFC Balanced Fund is an aggressive hybrid fund that seeks to generate capital appreciation through a portfolio of equity and debt instruments, typically with a 60% exposure to equity and the remainder in debt instruments.

Investing in HDFC Balanced Fund through Systematic Investment Plans (SIPs) is a cautious and recommended approach, especially for new investors or conservative investors. SIPs allow you to invest fixed amounts at regular intervals, such as monthly or quarterly. This helps to average out the purchase cost and reduce the risk of catching the market at a particular level.

For example, if you invest a lump sum in a balanced fund, there is a chance of investing at a market peak, which can lead to sudden losses. On the other hand, SIPs allow you to invest at different market levels, reducing the impact of market volatility. By investing a fixed amount regularly, you purchase more units when the market is low and fewer units when the market is high, averaging out your purchase cost over time.

Additionally, SIPs offer the benefit of rupee cost averaging. This means that you buy more units when the price is low and fewer units when the price is high, which can result in a lower average cost per unit over time. This strategy helps to reduce the overall impact of market fluctuations on your investment.

It is also important to note that balanced funds, including HDFC Balanced Fund, are predominantly equity funds. To maintain their status as equity funds for tax purposes, at least 65% of the underlying assets must be invested in equity. This percentage is often higher in practice, with some funds investing 70% to 80% in equity. Therefore, when considering the short-term volatility, treat balanced funds as equity funds. They can experience sharp rises and falls, although less extreme than pure equity funds.

In conclusion, investing in HDFC Balanced Fund through SIPs is a prudent strategy that can help you build wealth over time. It allows you to average out your purchase cost, reduce the risk of market timing, and benefit from rupee cost averaging. However, it is essential to assess your risk profile, investment goals, and time horizon before making any investment decisions.

Frequently asked questions