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Suresh Krishnamurthy

Recommendation: FIBF: Hold FTIBF: Hold

EXISTING investments in Franklin India Balanced Fund and FT India Balanced Fund (Pioneer ITI Balanced Fund) can be held. The performance of these two funds has been considerably below that of the top-performing fund in this category since September 2000. However, compared to a balanced fund index (calculated based on Nifty and JP Morgan India Government Bond Index with 60 per cent equity and 40 per cent balanced on a monthly basis), the performance has been better. Fresh investment need not, however, be considered now.

But investors have to consider the following aspect. These schemes may be merged following the acquisition of Pioneer ITI Asset Management Company by Franklin Templeton India. This introduces considerable uncertainties regarding the investment strategy to be followed after the merger.

This investment strategy assumes importance since the two funds differ considerably in approach. It is possible that Franklin India Balanced Fund may be merged into FT India Balanced Fund, as the latter is larger. But that may not mitigate the impact of the merger for investors in FT India Balanced Fund. It is quite likely that the disciplined allocation approach of Franklin India Balanced Fund is what will pay off. That may not be an altogether bad outcome for the investors as such a strategy may be effective over the long term.

<>Suitability>: The merger may have an impact on performance in the short term. The adverse impact, if any, will be mitigated over the long term. The merger's impact on the investment strategy and its consequent impact on performance are not quantifiable now. Investors need to consider this risk aspect before deciding to hold their investments.

<>Performance>: The performance of the FT India Balanced Fund has been superior to Franklin India Balanced Fund when considered from the launch of the latter in August 2000. However, over a one-year period, the gulf in performance has narrowed considerably.

In the last six months, Franklin India Balanced Fund's performance has been superior. Across all the three periods, the performance of both the funds has been better than that of a balanced fund index and considerably inferior to that of Zurich Prudence, one of the top performing funds in that category.

In terms of volatility of net asset value (used to measure risk), Franklin India Balanced Fund has historically had relatively much lower volatility, less than that of Zurich Prudence and the balanced fund index. The opposite is the case with FT India Balanced Fund. These characteristics have not changed in the last year.

In terms of performance adjusted for risk, FT India Balanced Fund scores over Franklin India Balanced Fund when considered from September 2000. However, over the last year, the performance of the latter has been vastly superior. Again, both the funds score over the balanced fund index while falling behind Zurich Prudence.

<>Asset allocation>: The difference in the characteristics of both the funds in terms of both return and risk reflects the contrasting approaches to investing followed by the two funds. FT India Balanced Fund follows an aggressive approach with allocation to equity seldom below 60 per cent.

Franklin India Balanced Fund follows a tempered approach, with equity remaining in the 50-58 per cent range. Since September 2000, the average difference in equity allocation between the two funds has been just over 6 per cent. Until recently, Franklin India Balanced Fund also had two different asset allocation patterns for its dividend and growth plans. It is not clear if the assets were merged to create a single investment plan.

The portfolio allocation of both the funds also differs. Though FT India Balanced Fund is much larger, it has concentrated exposures. The number of stocks in the portfolio is 25 compared to 33 stocks in the portfolio of Franklin India Balanced Fund. The top five stocks account for 28 per cent of net assets in FT India Balanced Fund while they account for 18 per cent of net assets in Franklin India Balanced Fund.

In sectors, FT India Balanced Fund and Franklin India Balanced Fund have around 21 per cent in IT sector, the top exposure. However, exposures to other sectors vary. Franklin India Balanced Fund is more bullish on auto and diversified sector stocks. FT India, on the other hand, is relatively more bullish on banking and oil and gas sector stocks.

There is considerable difference in terms of stock selection and allocation to particular stocks also. Stocks such as ICICI Bank, Sun Pharma, L&T, Indian Hotels, Tisco, ONGC and Raymond Woollen figure only in FT India Balanced Fund, and account for 17 per cent of the net assets.

Overall, there is a vast divergence in the strategy followed by these two funds. A merger of the two is thus likely to lead to just one strategy being followed.

It is likely that the disciplined approach of equity investments of not more than 60 per cent of Franklin India Balanced Fund will survive. This is because it is keeping with the investment philosophy of Franklin Templeton. That may not be bad if the fund achieves success in stock selection and builds on its recent performance record.

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