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Aarati Krishnan

INVESTORS in the Franklin India Balanced Fund can hold their investments in the fund for now, though the fund has been among the better performing balanced funds in the year 2001, thanks mainly to an NAV spurt in the last quarter.

The fund has stuck to a conservative asset allocation pattern, with equity exposure at 50-58 per cent, which has probably been the key factor in its favour. The Growth option has significantly outperformed the Dividend option. Fresh investments in the fund need not be contemplated now. The relatively short track record makes it difficult to judge the consistency of its performance across market cycles.

The following features emerge from an evaluation of the portfolio over the past year:

The fund appears to have actively used asset allocation as a tool to pep up performance. Instead of sticking to a pre-set proportion between debt and equity, as some other balanced funds do, the fund appears to have switched between these two asset classes depending on its view on the markets. For instance, the fund started out with a 56 per cent exposure to equities in September 2000, reduced equity exposure to around 51 per cent by June 2001 and again enhanced equity to 57 per cent over the second half of 2001.

This appears in keeping with the terms of the original offer, which stipulate that the fund managers have the right to invest up to 60 per cent in any asset class. While this approach could help maximise returns for investors if the fund makes the right calls, it does carry a higher degree of risk than a balanced fund with a passive approach to asset allocation. Not only do the fund managers have to take calls on the individual constituents of the portfolio, they also have to take a call on the future direction of both the debt and equity markets.

The fund started out with a relatively high exposure to IT stocks, which accounted for 19 per cent of assets in September 2000. But this proportion declined sharply in the period to September 2001, when it was down to 3 per cent. The fund stepped up its IT exposure in the final quarter of 2001.

The top holdings of the fund have reflected this trend. In September 2000, five of the fund's top ten equity holdings were IT stocks (Infosys, Satyam, SII, Polaris and Hughes). This number was down to three by June 2001 and to just one stock (Satyam Computers) by September 2001. By November 2001, Infosys had made a re-entry into the top ten holdings.

Over this period, the fund's equity portfolio has also switched from being entirely dedicated to growth stocks to allocating a significant proportion of assets to cyclicals. Grasim, Indo Gulf and Bharat Petroleum were some of the new entrants to the equity portfolio.

In debt, the fund has largely stayed clear of gilts. Bonds from financial institutions (IDBI and ICICI) and corporates such as Tata Electric have dominated the debt portfolio. Since corporate and FI bonds generally enjoy a lower level of liquidity than gilts, the fund has probably not traded too actively on its debt portfolio. This could have resulted in a few missed opportunities over 2001.

In contrast to the usual practice, the fund has disclosed separate portfolios for the Dividend and Growth options at periodic intervals. The holdings for the two Plans have not been very different. However, the two options have differed significantly in their asset allocation pattern.

Between January and September 2001, the dividend Plan has consistently maintained a higher equity exposure than the Growth Plan. In December 2000, the Dividend Plan had 51 per cent of its assets in equities and 17 per cent in cash, while the Growth Plan had a higher 56 per cent in equities and just 3 per cent in cash. By October 2001, the position had reversed. The Growth Plan now had a lower 54 per cent allocation to equities, while the Dividend option had a 56 per cent exposure. The Growth Plan also had a higher cash position of 10 per cent relative to the Dividend Plan (5 per cent).

Fund facts: Franklin India Balanced Fund was launched in August 2000. The fund managed Rs.10.28 crore in net assets by end of November 2001. The fund levies an entry load of up to 1 per cent for investments below Rs 2 lakh. There is no exit load for withdrawals less than Rs 2 lakh.

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