Do balance funds give better returns than equity funds?

The adage of ‘do not put all your eggs in one basket’ goes perfectly with financial investments. Investing in diversified asset classes helps you to build a portfolio that will achieve financial security for you in long term. Balance funds also known as hybrid funds do this for you.  Balance Funds are the category of mutual funds which invests in a mix of stocks and bonds.  There are basically two types of balance funds, equity-oriented and debt-oriented. Around 65 to 80% of equity-oriented balance funds invest in equity and the balance in debt instruments. For debt-oriented, the weight reverses.

For equity-oriented balance funds, the rise during the bull market may not be as high as pure equity funds, but they will also not fall drastically during the market turbulence. The debt portion brings stability to the fund's return and provides a cushion during market downsides. For example, during the sub-prime crisis of 2008-09, CRISIL - AMFI Balance Fund Performance Index annualised return (Jan 1, 2008 to March 31, 2009) was -35.93 per cent compared to -43.42 per cent of Nifty. Similar was the case during European crisis of 2011-13, when on average balance funds generated positive return compared to negative return by Nifty.

Balance funds are also a tax-efficient way of having a debt exposure as most balance funds maintain at least 65 per cent exposure to equities, thereby allowing them to be taxed like equity funds.

In last one year (ending December 14, 2017) on an average, equity funds (including sector funds) have generated returns of 29.95 per cent compared to 13.97 per cent generated by balance funds. However, this outperformance becomes dull if we check the risk taken to generate extra returns. If we take standard deviation as a proxy to risk, on average equity funds have a standard deviation of 14.59 per cent compared to 5.75 per cent by balance funds. Sharpe ratio that calculates risk-adjusted return also is in favour of balance funds. Balance funds on an average have Sharpe ratio of 1.31 compared to 0.53 by equity funds.

Risk Return Profile of equity and balance funds (1-Year)

In the long-term performance of the balance funds are better than pure equity funds. In last 10 year ending September 2017, balance funds have generated a return of 11.51 per cent compared to 10.45 per cent by equity funds. One of the reasons for such good performance of these funds is that in the long run, they are better able to contain the market fall than the equity funds. Hence, if you are a risk-averse investor with long-term investment horizon, balance fund is apt for you.

Long-term performance of Balance and Equity Funds

Returns as on September 29, 2017, returns for period greater than one year are annualised returns