Principal Balanced Fund: A hidden gem

We see a tendency among many investors and financial advisors of preferring popular mutual funds. Funds become popular by dint of their past performance and are thereafter, sought after by investors. However, many a times, in this process, investors or financial advisors fail to notice less popular funds which have delivered outstanding performance and have great potential in the future. In this blog post, we will review, Principal Balanced Fund which has delivered outstanding performance over the past one year.

What are Balanced Funds?

Balanced Funds are hybrid equity oriented mutual funds. Minimum equity allocation in these funds is 65%. Balanced Funds enjoy equity taxation. Long term capital gains (investment tenure of more than 1 year) in balanced funds are totally tax free. Dividends paid by Balanced Funds are also tax free. The equity allocation of balanced funds can generate superior returns over a long investment horizon, while the debt allocation limits volatility and downside risks in market corrections. Our internal research in Advisorkhoj shows that, Balanced Funds can deliver superior risk adjusted returns compared to many mutual fund product classes.

Principal Balanced Fund

Principal Balanced Fund is the best performing balanced fund in the past one year (please see the Top Performing Balanced Funds in our MF Research Section). The chart below shows the trailing annualized returns of Principal Balanced Fund versus the Equity Oriented Hybrid Fund category over the past 1, 3, 5 and 10 years.

Source: Advisorkhoj Research

You can see that, Principal Balanced Fund outperformed the category over the past 1, 3, 5 and 10 year time-scales. In fact, Principal Balanced Fund was a Top 10 Performer even in the last 3 and 5 years (please see the Top Performing Balanced Funds in our MF Research Section). The chart below shows the annual performance of Principal Balanced Fund versus Equity Oriented Hybrid Fund category in each year over the past 5 years.

Source: Advisorkhoj Research

You can see that, Principal Balanced Fund outperformed the category in most years over the last 5 years.

Principal Balanced Fund was launched in January 2000 and has around Rs 180 Crores of Assets under Management (AUM). The expense ratio of the fund is a little on the higher side at 2.8%; as fund grows in size, the expense ratio is likely to come down in the future. Veteran fund manager P.V.K Mohan and Bekxy Kuriakose manage this scheme. Funds managed by these fund managers include top performing funds like Principal Growth Fund, Principal Tax Saving Fund etc. The chart below shows the Net Asset Value growth of Principal Balanced Fund over the last 5 years.

Source: Advisorkhoj Research

Rolling Returns of Principal Balanced Fund

We have discussed many times in our blog that rolling returns is the best measure of mutual fund performance because it is not biased by specific market conditions like trailing and point to point returns are. The chart below shows the 3 year rolling returns of Principal Balanced Fund over the past 5 years. We have chosen a 3 year rolling returns period because in our opinion, investors should have at least 3 year investment tenure (if not more) for investing in balanced funds.

Source: Advisorkhoj Rolling Returns Calculator

You can see that, 3 year rolling returns of Principal Balanced Fund beat the category nearly 88% of the times in the last 5 years. This reinforces our view that this is a very well managed fund. The maximum rolling returns of this fund is around 23%. You can see that the minimum three year annualized rolling return was around 10%, implying that, investors would have almost always got double digit returns by investing in the fund with 3 year investment tenure over the last 5 years.

The maximum 3 year annualized rolling return of the fund was around 23%, which is quite outstanding given that Principal Balanced Fund is a hybrid fund (with more than 30% allocation to fixed income / debt). The average 3 year annualized rolling return of the fund was around 17%, while the median 3 year annualized rolling return was also around 17%. Principal Balanced Fund gave more than 20% annualized 3 year rolling returns more than 14% of the times in the last 5 years. The fund gave 15 to 20% annualized 3 year rolling returns more than 56% of the times in the last 5 years. This implies that, the fund gave more than 15% annualized 3 year rolling returns more than 70% of the times in the last 5 years – this is the kind of performance one can expect from a top performing balanced fund.

Asset Allocation and Portfolio Construction

The current asset allocation of the fund is 67% equities, 29% debt and around 4% cash or cash equivalents. The Top 5 sectors of the fund portfolio are Banks, FMCG, Pharmaceuticals, Finance and Petroleum Products. You can see that, the fund managers have a mix of both cyclical and defensive sector allocations with a bias towards cyclical sectors. The portfolio mix has the potential to deliver good capital appreciation in the future while maintaining stability in volatile markets to an extent. The Top 5 stocks in the portfolio are Hindustan Unilever, ICICI Bank, Chambal Fertilisers, Reliance Industries and Philips Carbon Black. The portfolio is well diversified from a company concentration standpoint, with the top 5 companies accounting for just 11% of the portfolio value.

Key Performance Statistics

The table below shows the key performance statistics of Principal Balanced Fund versus the Balanced Fund category.

Source: Advisorkhoj Research

Lump Sum and SIP Returns

The chart below shows the growth of Rs 100,000 invested in Principal Balanced Fund (Growth Option) over the last 5 years.

Source: Advisorkhoj Research

By investing Rs 100,000 in Principal Balanced Fund 5 years back, you could have made a tax free profit of nearly Rs 126,000 and your current investment value would be around Rs 226,000; an annualized return of nearly 18%.

The chart below shows the return of Rs 5,000 monthly SIP in Principal Balanced Fund (Growth Option) over the last 5 years.

Source: Advisorkhoj Research

With a cumulative investment of just over Rs 3 lakhs you could have made a profit of almost Rs 1.7 lakhs and your current investment value would be around Rs 4.75 lakhs. The annualized SIP return over the last 5 years was nearly 18%.

Dividend History

The table below shows the dividend history of Principal Balanced Fund – Dividend Option since 2016. You can see that, the scheme has been paying regular dividends to its investors.

Conclusion

Principal Balanced Fund has completed 17 years. The performance over the past year or so has been exceptionally good. The fund has also been a consistent performer over the past 5 years. Investors with moderately aggressive risk appetites can invest in this fund with a long horizon. Investors should consult with their financial advisors if Principal Balanced Fund is suitable for their investment needs.