Scorecard Of Balanced Advantage Funds: Winners When Market Corrects, Laggards In Rallies
July 20, 2021
An important key to investing is to remember that stocks are not lottery tickets.
The usual strategy is that the fund invests at least 65 per cent of the portfolio in equity, to be eligible for equity taxation
It is a re-categorization of Hybrid Funds done by SEBI and it differs from Balanced Funds. Balanced Funds have a fixed ratio for investment in equity and debt with a narrow band for flexibility, about 40-60% equity allocation, whereas Balanced Advantage Fund invests 33% in pure equity and 33% in arbitrage to keep gross equity investments around 65% and invest the rest in debt. It has the flexibility for dynamically shifting the corpus to and from equity/debt. It aims for capital appreciation but also seeks to guard against volatility. They are taxed under Equity Funds (10%) and not Debt Funds (20% with indexation).
Allocation in BAFs
Let us take an illustration. Let us say a BAF fund has a corpus of Rs 100. Of this, Rs 80 is in equity, referred to as the ‘long’ position earlier, and Rs 20 in debt. The fund manager is of the opinion that the equity market is richly valued and intends to reduce the effective equity exposure. Accordingly, s/he goes ‘short’ on, say, half the equity exposure, i.e., takes a sale position of Rs 40 in the stock futures market. The implication of the move is that equity price volatility, either favourable or unfavourable, is cancelled out for half of the equity exposure. The fund has 80 per cent long and 40 per cent short exposure; hence, 40 per cent is the net long equity position.
Does the concept work?
There are, however, two sides to a coin. BAF funds would lose relatively less on the downside, but would gain less on the upside. During the period March 23 to July 21, the average return from BAF funds was 26 per cent, while that from large-cap funds was 39.8 per cent. Small-caps managed 36.4 per cent, while multi-cap schemes delivered 39 per cent over this period. From another perspective, in this volatile phase from January 14 to July 21, BAF funds have yielded, on an average, minus 1.5 per cent, against minus 9.1 per cent of large-cap, minus 10.6 per cent of small-cap and minus 9.4 per cent of multi-cap.
Deciding on the right fund
How should you pick your BAF? The method followed by various AMCs for deciding the effective equity exposure varies. The parameters used are Price to EPS (earnings per share), Price to Book Value, momentum, trend, volatility, dividend yield, earnings yield, market cap to GDP ratio, etc. Some AMCs have a more objective strategy: the output of the model followed by them, which is a combination of the factors mentioned above, decides the net equity exposure. In some AMCs it is a fund manager-driven approach. So, the fund manager decides the effective equity exposure based on his/her reading of the market. Others will have a strategy combining objective (model-driven) and subjective (fund manager driven) factors.
If you think this strategy of varying the net equity exposure works for you, you have to zero-in on the funds for your allocation. The parameters are the strategy followed and long-term track record. For most of the funds in this category, the track record in the real sense is available for only about two years since the implementation of the SEBI norms. Some AMCs giving a longer track record have a repositioned fund since mid-2018.
Benefits of Investing in Balanced Advantage Funds
Balanced Advantage Funds draw certain benefits over other mutual fund schemes as below:
Returns
Most of the balanced advantage funds seek high returns from equity investments. However, the fund managers shift the fund into bonds when market valuations go high.The dynamic asset allocation helps in reaping benefits of equity while safeguarding it from market volatility. It delivers higher returns than debt funds and is similar in structure to equity funds with lesser rigidity
Diverse Portfolio
The dynamic allocation provides flexibility to the managers and portfolio diversity to the investors as there is continuous shifting in assets as per prevailing market conditions. Equity investments are also pan sectors and across market capitalization
Relatively Safer
Balanced Advantage Funds are relatively less volatile and safer than other equity funds as when markets are expensive, fund allocation to debt is increased which acts as a security. Similarly, the reverse is done when the market is favourable. Effective equity and debt allocation help in risk adjusted returns
Things to be considered before investing
Every investment requires a sufficient amount of research and valuation of factors such as risks involved, history of returns accrued, business proficiency of the holdings etc. Here are some of the things which must be considered by an investor before investing into the Mutual Funds:
- Financial Goal– Before making any investment decisions, it is very important to evaluate that the fund objective is aligned to your financial goals
- Fund Performance– Measuring the performance of the fund in both bullish and bearish market situations is a necessity as it helps the investors in selecting a reliable fund. One should always choose a fund which has been performing with consistency
- Fund House & Management– There are numerous Mutual Funds regulated by different AMCs (Asset Management Companies). Fund houses & Fund Managers play a very decisive role in the allocation of assets and selection of stocks. If the management has enough experience and expertise, the fund will easily sail through promising market conditions and deliver good returns
- Costs Involved– There are different costs involved in Mutual Fund investments such as Expense Ratio, Entry Load and Exit Load. Investors must review these costs before heading up for investments>
- Other Basics from the Portfolio: There are other different factors such as the fund NAV (Net Asset Value), AUM (Assets under Management) etc. which are to be viewed to make sure of the reliability and investor engagement in the fund
