Every investor seeks options that can provide excellent returns consistently with minimum capital erosion. The unabated rise in equity markets over the past three and half years made sure that equity funds hog the limelight. The higher interest rate regime and the possibility of a slowdown in corporate earnings could change the story in 2007. This is where funds that invest can invest in a combination of equity and debt comes in. HDFC Prudence Fund has managed this task since its launch in 1994. It belongs to the genre of balanced funds that can invest in a blend of equity and debt instruments, depending upon the fund manager’s view about the market. The fund is the largest amongst its peers, with a whopping asset size of Rs 2,324 crore.

The fund has performed outstandingly over the long-term horizon. It ranks at the top among its peer group, having posted annualized returns of 27.51%, 35.46% and 38.92% over the last one, three and five years respectively. It has thereby outperformed its benchmark index, Crisil Balanced, which has given returns annualized of 21.01% and 18.47% over the last one and three years respectively. In the near term, the fund has given returns of 16.57% for last 6 months.

However, over the past one year, the performance of the fund has slipped as the total assets under management (AUM) have grown to Rs 2,324.09 crore, up 45% from Rs 1,606.25 crore. It still successfully managed to post better returns than the group median. At the same time, it is worth mentioning that the fund has managed to survive the stock market crash of May 2006. The stellar performance may be attributed to its top holdings in Reliance Industries, Infosys Technologies, Crompton Greaves, Goetze India which saw a limited downside, compared with others. The fund later identified good buying opportunities and made aggressive purchases in equities and increased its equity exposure up to 75%. The fund earned good returns on equity as the market recovered subsequently.

When queried by myiris on the investment philosophy, the Chief Investment Officer of HDFC Mutual Funds, Prashant Jain said that the equities portfolio focuses on building a diversified portfolio of well managed strong companies with decent growth prospects that are available at a reasonable price. The bond portfolio continues to maintain a short duration for the last few years with a predominantly buy and hold strategy in view of the rising interest rates environment. He added that the fund has maintained and continues to maintain discipline in asset allocation, diversification and quality of the holdings.

The fund has increased its exposure to debt from 25.63% in November, 2006 to 27.84% in January 2007, given the rising interest rate scenario. Debt instruments presently constitute 8.78% and money market instruments constitute 19.06% of the fund’s total portfolio. Commenting on the impact of the recent CRR hike on fund portfolio, Prashant Jain said, “CRR hike is one of the many factors that impact the markets, therefore it would not be correct to comment on its impact on the fund portfolio or the markets. Further the tightening of liquidity is not good for asset prices.”

The fund adopts a blend of growth and value-buying strategy while picking up stocks, with a focus on mid-caps. Some of the fund’s favorite stocks over the last year include Infosys Technologies, AIA Engineering, Pidilite Industries, Amtek Auto, Goetze India, Bank of Baroda and Exide Industries. The number of stocks held in the portfolio is fairly static at 43, which is an increase of hardly five stocks compared with the year-ago period. The top 10 stocks account for about 36.25% of the fund’s portfolio. The fund has been typically investing in 12 to 20 sectors.

The fund is also fairly bullish on industrial capital goods and FMCG. “The prospects of both these sectors are reasonable. Both sectors offer good quality companies, low capital intensity, decent and sustainable growth,” Jain said. Over the last three months, the fund has increased its exposure to industrial capital goods from 5.34% to 13%. On the other hand, it has gradually reduced its exposure in auto & ancillaries industries to 10.08% from 13.22%, and in the FMCG sector, from 12.25% to 9.39%.