Analysis using long term equity and debt funds in India

Part 1: Only Equity Fund

Data used: NAV of Franklin Blue Chip funds, since its inception. Modifications: Used average monthly NAVs for analysis. I did not put the 2% investment charge which was there for most of the period.

Some basic data:

Few conclusions:

1. This is a conservative large cap fund. Even then the gyrations are very strong.
2. Returns in equity funds have always been volatile, even 20 years ago and the increased volatility is not a new thing.
3. There can be long periods (8 years in this series) in which the NAV has not gone anywhere between the start and the end.
4. The near or medium term past performance is completely different from what is going to happen in the future. There can be a huge spike in 1 year followed by all the way of retracement OR there can be 4 years of unbelievable increases with sudden whip-lash.

Part 2: Separate Equity and Debt Funds

Data used: NAV of Franklin Blue Chip and Templeton Income Builder Account funds, since their inceptions.

Modifications: Used average monthly NAVs for analysis. I did not put the 2%/1% investment charge which was there for most of the period.

Asset Allocation Basics:

1. Started in July 1997, since that is the first month of the income fund.
2. Started with monthly investment of 10,000, with yearly increase of 10-15% every financial year.
3. Used different styles of portfolio management / asset allocation as detailed below.
4. Total investment amount from Jul 1997 to Feb 2014 has been 69L.

Pure Equity / Debt - In this, all money was put into the equity / debt fund.

Auto 60:40 / 70:30- If the asset allocation of equity was <= 60% (or 70%), then the monthly investment was done into the equity fund, otherwise the money was put into the debt fund. No amount of money from transferred from one asset to another even when the asset allocation was out of range to avoid taxes.

Max Drawdown- This is the amount by which the total corpus suffered from its peak (the maximum downside).

Ulcer Index- supposed to be a better indicator of Risk compared to SD.

The Chart

Few Conclusions:

1. For the first 6-8 odd years, there is no significant difference between any of the methods, since the monthly amount was a big chunk (hypothesis that till the monthly amount is about 1% of the total corpus, there is not much of a difference in the amounts provided all other parameters are kept same. 100 months = 8 odd years).
2. There is not much of a difference between a 60:40 and a 70:30 asset allocation.
3. For long periods of time (some years), all monthly investments were done in one or the other asset to bring back the ratio to the prescribed levels.

Part 3: Using Mid and Small Cap fund

Data used: NAV of Franklin Prima a mid and small cap fund and Templeton Income Builder Account funds, since their inceptions.

The basics and methodology is similar as from Part 2 .

The numbers in brackets represent the values when Franklin Blue Chip fund was used instead of Franklin Prima fund.

The Chart for Prima fund .

Another chart which compares the Pure Prima fund, Pure Bluechip fund, and a 60:40 allocations of both the funds. Link .

Few Conclusions:

1. The returns using Franklin Prima fund show more return with even more volatility, as compared to with using Franklin Blue Chip fund, along all parameters (100%, 60:40 and 70:30).
2. The maximum drawdown in case of balanced (60:40 or 70:30) asset allocation is still high (nearly 50%), which means even with partial rebalancing, the corpus can go down to half of the peak (this is a chilling thought). This is shown in the Ulcer Index too.
3. It is interesting to note that the Ulcer Index of Pure Equity in both the cases is same (at 19%).
4. The pure large cap fund almost behaves similar to the 60:40 equity:debt combination of the mid-small cap fund. Only in the later years, the pure equity fund has taken a slight lead. While the 70:30 combination slightly leads the pure large cap equity. This means that a balanced fund with mid and small cap leanings (eg HDFC Prudence) behaves like a pure large cap equity fund.

EDIT:

For a pure investment into HDFC Prudence, the values are:

This is even more surprising. The Ulcer Index and Std Dev are nearly the same as the large cap 60:40 ratio, while the returns are much better than any other combination with either the Prima or the Blue Chip fund, except for pure Prima fund. The corresponding Chart .