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Suresh Krishnamurthy

HDFC Prudence is among the few funds in which you can invest with a long-term perspective. Its performance over a considerably long period has been impressive. Investors can consider investing especially through the systematic investment plan. The fund's strategy so far needs to be considered risky. The fund's record, however, shows that the risks taken have paid off so far.

The size of the fund has been increasing steadily over the past couple of years. This could challenge its ability to significantly outperform the market and peers. The comparable increase in the size of the market is, however, encouraging, and there are opportunities to outperform. The strategy of reducing losses in a falling market, as a means to accumulate wealth, augurs well for investors.

Performance: In relation to fund performance, the noteworthy feature has all along been the equity-type returns generated by the fund without the volatility in returns that such instruments carry.

Even in the past 12 months, its performance has matched that of several equity funds or even bettered it, though only about 65 per cent of the fund's assets are invested in equities and the debt market has been in the doldrums.

Between the start of the bull market in April 2003 and now, the fund's returns are one-third more than that of Nifty while its volatility is one-third less. The fund has maintained this characteristic of low volatility and high returns compared to an equity index over a long period that includes a severe bear market.

The performance may be due to a number of fortuitous events. In the Indian market, debt prices were booming when equities were declining and equities are now booming when debt has cooled off considerably.

Also, in the bear market of 2000, HDFC Prudence was a smaller-size fund giving the manager considerable leeway to protect the fund from losses. Notwithstanding these advantages, it is also true that the fund had a strategy to take advantage of the circumstances.

Portfolio allocation: At the end of April 2005, the fund had about 8 per cent in cash. This is high compared to normal levels, as the fund generally stays almost fully invested. The fund had about 30 per cent in debt. During normal times in the debt market, the fund's invested position in the debt market is between 35 and 40 per cent. The fund had 63 per cent in equities.

The equity portion of the fund is almost totally invested in mid-cap stocks. This enhances the risk involved in the fund. The marriage of risky mid-cap stocks with that of counter-cyclical debt in a balanced fund may, however, turn out to be a rewarding strategy.

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