HDFC Prudence Fund - Invest by Business Line

Smart management of the debt portfolio has helped the fund even out returns, given the volatile equity market.

HDFC Prudence Fund, a balanced fund, appears to be a good investment option offering investors the opportunity to benefit from the improved return potential on debt investments, as well as long-term returns from equities. With a 13 per cent return over the past one-year, HDFC Prudence has fared better than the majority of pure equity funds over this period.

Active management of the debt portfolio to take advantage of higher interest rates on corporate debt appears to have helped the fund's performance in a scenario where equity returns have flagged as a result of market volatility. The fund's 3 and 5-year performance, which shows a compounded annual return of 34 per cent and 37 per cent respectively, is superior within the universe of balanced funds.

Suitability: HDFC Prudence is a balanced fund that has the flexibility to allocate between 40 and 75 per cent of its portfolio to stocks, with the balance invested in debt and money market instruments. In practise, though, the fund has consistently carried an equity tilt.

In recent months, the equity allocation has been consistently pegged close to the 74 per cent mark. The stock choices in the equity portfolio have tended to be unconventional, with a distinct mid-cap bias.

Though the balanced portfolio provides a degree of protection to investors against downside when compared to pure equity funds, the fund's mid-cap bias has made for significant vulnerability to corrective phases in the market (The fund's NAV witnessed a 20 per cent decline during the 29 per cent fall in the Sensex between May 10 and June 14 2006). The fund may not be well suited to investors who are completely averse to risk.

Performance: The 13 per cent return on HDFC Prudence over the past one year compares favourably with the CRISIL Balanced Fund benchmark, which delivered 9.4 per cent.

Given that the fund's equity allocation was capped at 70-75 per cent during this period, it has also fared quite well relative to the Sensex (14.4 per cent).

A couple of balanced peers — FT India Balanced Fund and Birla Sun Life`95 — have managed marginally higher returns than HDFC Prudence over a one-year period. Over longer time frames such as three and five years, Magnum Balanced is the only fund in the peer group that has managed to do as well as HDFC Prudence.

Portfolio: The fund maintains a well-diversified equity portfolio with a distinct mid-cap bias.

The fund's sector exposures are splintered across a wide range of sectors, with businesses such as pesticides, chemicals, textiles and transport finding representation in the portfolio.

Capital goods, auto ancillaries and FMCGs were the top sector picks in February 2007.

The stock picks have been quite unconventional. For instance, within capital goods, the portfolio featured AIA Engineering, Crompton Greaves and Elecon Engineering as key exposures.

In recent times, the fund also appears to have taken advantage of the expanding investment options in the debt space by more actively managing the debt portfolio.

The debt portfolio has a short-term bias, with a high allocation to corporate debt, reflective of the relatively attractive returns available in this segment.

Though the debt portion of the portfolio has been a drag on performance over a three-year time frame, this appears to be changing now, with relatively attractive interest rates, especially in the short-term segment.

HDFC Prudence appears to be a good vehicle for investors looking to capitalise on equity returns, with an added debt allocation for stability.

Fund facts: Launched in 1994, HDFC Prudence is one of the few balanced funds with a 10-year track record in the Indian market. It is managed by Mr Prashant Jain.