Equity markets rallied up after Modi-led-NDA government’s victory happened. On the day of election results, Nifty 50 witnessed high volatility as the index swung in the range of 3.7%. It crossed the psychological mark of 12,000 (and on the S&P BSE Sensex 40,000) but couldn’t sustain those levels.

And in the debt markets, the ripple effect of downgrading on account of defaulters continued to erode investors’ hard-earned money and make them disappointed.

Hence there has been a growing need as both the prime asset classes being uncertain, is there a way out for the investors? Few fund houses launched Balanced Advantage Fund, an open-ended scheme that is a sub-category of hybrid funds,  which was originally a subset of balanced funds. But, since the re-categorisation of mutual funds this was a newly formed category.

The balanced advantage/dynamic asset allocation fund mitigates the risk by dynamically managing the allocation between equity and debt as per the prevailing market valuation and sentiment in each asset class. It aims to make optimum use of equity and debt to give the best of both worlds. If need be it captures potential gains by using arbitrage opportunities.

[Read: Balanced Hybrid Funds: A Solution For Tactical Asset Allocation?]

Thus even Shriram Mutual Fund, a Kolkata based mutual fund house saw this as an opportunity to attract investors with the launch of Shriram Balanced Advantage Fund(SBAF)- an open-ended hybrid– dynamic asset allocation fund.

As the fund house is of the view that this equity and debt allocation adjustment helps in avoiding timing the market and eliminates investor emotional biases.

Besides, SBAF has the flexibility to vary its equity exposure between 0%-100%. But under normal circumstances it aims to allocate its assets between 65% to 100% in equities, equity related instruments and equity derivatives across market cap (including unhedged and hedged equity). Plus, it will have exposure to money market instruments, securitized debt & units of debt and liquid category schemes & Cash to counter the downside risk in equity markets.

Yet in terms of risk-return matrix, this scheme is placed at moderate-risk, moderate-return investment proposition as it is skewed more towards equity.

Table 1: NFO Details

Type An Open Ended Dynamic Asset Allocation Fund. Category Hybrid: Dynamic Asset Allocation
Investment Objective

To generate capital appreciation with relatively lower volatility over a longer tenure of time. The Scheme will accordingly invest in equities, arbitrage opportunities, derivative strategies and debt and money market instruments.

However, there is no assurance or guarantee that the investment objective of the Scheme will be achieved. The Scheme does not assure or guarantee any returns.

Min. Investment Rs 5,000 and in multiples of Rs 500 thereafter Face Value Rs 10 per unit
  • Regular
  • Direct
  • Growth (default option)
  • Dividend
    • Payout
    • Re-investment (default)
Entry Load Nil Exit Load If redeemed / switched-out within 365 days from the date of allotment:
  • Upto 12% of units held by the investor: Nil
  • More than 12% of units held by the investor: 1% of applicable Net Asset Value (NAV)
If redeemed/switched out after 365 days from the date of allotment: Nil
Fund Manager Mr Kartik Soral Benchmark Index CRISIL Hybrid 35+65 – Aggressive Index
Issue Opens June 14, 2019 Issue Closes: June 28, 2019

(Source: Scheme Information Document)

How will the scheme allocate its assets?

Under normal circumstances, it is anticipated asset allocation pattern of the SBAF would be as under:

Table 2: SBAF’s Asset Allocation

InstrumentsIndicative Allocation Risk Profile
Minimum Maximum
A. Equity and Equity Related Instruments including Derivatives65%100% High
B. Debt (including money market instruments, securitized debt & units of debt and liquid category schemes) & Cash 035 Low to Medium

(Source: Scheme Information Document)

What will be the Investment Strategy?

The investment strategy would be aimed at meeting the investment objective of the Scheme. The equity & debt exposure in the portfolio will be dynamically managed in the portfolio to minimize the risk and optimize returns for a long-term investor. The fund manager will invest into opportunities available across the market capitalization.

The Shriram Balanced Advantage Fund would invest in companies based on various criteria including sound professional management, track record, industry scenario, growth prospectus, liquidity of the securities, etc. The Scheme will emphasize on well managed, good quality companies with above average growth prospects.

The extent of equity exposure will be dependent on the fund manager’s outlook of:

  • The overall economic scenario in the country,
  • Global events,
  • Market conditions,
  • Valuation factors of the equity market in general such as Price to Earnings (PE), Price to Book Value (P/B), Earnings Yield etc. of the broader market,
  • Momentum factors,
  • interest rate factors such as 10-year gilt yield, 1-year treasury bill yields etc.

Within equity allocation the portfolio construction will be based on thematic approach to bottom up stock picking.

[Read: Growth v/s Value Investing: Which Is Better Of The Two In Current Times?]

The Scheme will use derivatives to hedge the downside risk of the portfolio. The derivatives may also be used for generating returns through arbitrage opportunities. The Scheme may take a call on the hedge ratio after weighing various factors including but not limited to, the following:

  1. The earnings growth of the stock
  2. The quantitative valuation parameters in the historical as well global context
  3. P/E Ratio
  4. P/ BV Ratio
  5. Price / Earnings Growth Ratio
  6. Price / Free Cash Flow
  7. Price / Cash EPS
  8. Expected Fund Flow
  9. Market Sentiment and
  10. Outlook

The Scheme will seek to reduce volatility of returns by actively using derivatives as hedge. The derivatives may also be used for generating returns through arbitrage opportunities. This may make the Scheme forgo some upside but shall protect downside.

Equity Investments: The investment approach would be based on the concept of economic earning power and cash return on investments. Five basic principles serve as the foundation for this investment approach. They are as follows:

  1. Focus on long term growth.
  2. View the investments as conferring a proportionate ownership of the business.
  3. Maintain a margin of safety (i.e. the price of purchase represents a discount to the intrinsic value of that business).
  4. Maintain an equity outlook on the market by regularly monitoring economic trends and investor sentiment.
  5. The decision to sell a holding would be based on one of three reasons:
  6. The anticipated price appreciation has been achieved or is no longer probable.
  7. Alternative investments offer superior total return prospects, or
  8. A fundamental change has occurred in the company or the market in which it competes.

Debt Investments: The Scheme will retain the flexibility to invest in the entire range of debt instruments and money market instruments. Investment in Debt securities and Money Market Instruments will be as per the limits in the asset allocation table of the Scheme, subject to permissible limits laid under SEBI (MF) Regulations.

Who will manage the Shriram Balanced Advantage Fund?

Shriram Balanced Advantage fund will be managed by  Mr Kartik Soral. 

Mr Kartik Soral serves as the Senior Fund Manager of Shriram Mutual Fund, having an experience of more than 10 years in his professional career. Mr Soral holds a PGDM from IIM Ahmedabad and a B.Tech in Chemical Engineering from IIT-BHU, Varanasi (erst. IT-BHU) and is a CFA.

Before joining Shriram Asset Management Company Mr Soral held the position of Fund Manager at Edelweiss Asset Management Co. Ltd. for more than 3 years. Before prior to that, he was also associated with Larsen & Toubro and Deutsche CIB Centre and had held key positions in the Corporate finance & Global Equity Derivatives department respectively.

Currently at the fund house, Mr Kartik manages Shriram Hybrid Equity Fund, Shriram Multicap Fund and Shriram Long Term Equity Fund.

Table 3: Performance table of the Schemes managed by Mr Soral

Scheme Name SI Benchmark Name Managing Since Returns (%) Benchmark Returns (%)
Shriram Hybrid Equity Fund Crisil Composite Bond Fund Index Nov-17 5.52 7.23
NIFTY 50 – TRI 10.43
Shriram Multicap Fund NIFTY 500 Oct-18 10.32 6.69
Shriram Long Term Equity Fund Jan-19* 0.6* 0.36*

*Since the scheme was recently launched, the returns shown are for a period of three months.
Data as on June 19, 2019
(Source: ACE MF-PersonalFN Research)

As can be seen, out of three schemes managed by the fund manager two schemes have been outperforming their respective benchmark index. Hence the management style does give confidence to investors.

The outlook for Shriram Balanced Advantage Fund:

In an endeavour to achieve the stated objective, Shriram Balanced Advantage Fund will invest in equities, arbitrage opportunities, derivative strategies and debt and money market instruments with reduced volatlity.

The fund house mentioned in its presentation, the factors that will drive the Equity exposure are primarily; Equity valuations, prevalent interest rates and market internals as shown in the diagram below. The fund managers would make use of hedged and unhedged equity and arbitrage to avoid any downside risks in the volatile markets. Hence the performance of the scheme weighs on portfolio and risk management strategies employed by the fund managers.

Image 1: Factors that drive Equity exposure

(Source: Shriram Balanced Advantage Fund Presentation)

Under this model, the portfolio construction will be such that it will increase the equity exposure during lower market valuations and during higher market valuations it will shift the exposure to debt arbitrage and fixed income instruments. The arbitrage option will be used to maintain a net asset exposure towards equity related instruments but tapping arbitrage opportunities is a challenging task.

Currently, equity markets corrected, and the 2019 Lok Sabha election results declared pushed the markets upward. But the corporate earnings haven’t been very encouraging; the Nifty 500 profit-to-GDP ratio is at a 15-year low. Plus, there are governance issues with a few companies. Earnings don’t justify the valuations and the average P/E of Nifty50 trails at 27.2x. If the economic growth does not pick up from here on, it may hurt the bottom line of companies. Corporate earnings haven’t been very encouraging for all companies in a respective market capitalisation segment.

Also, the 10-yr G-Sec yield eased by good 38 bps in May 2019. So far in 2019, the benchmark yield is down by 34 bps. As regards to the liquidity conditions in the system, after remaining in deficit during April and most of May due to restrained government spending, it turned into an average daily surplus of Rs 660 billion in early June, the RBI observed.

In the 2nd bi-monthly monetary policy statement for 2019-20 (held in June 2019), the RBI reduced the policy rate by another 25 bps, placing the repo rate at 5.75% and consequently the reverse repo rate at 5.50%. Plus, the Monetary Policy Committee (MPC) changed the stance of monetary policy from neutral to accommodative and it reduces the scope of further reduction in policy rates by the RBI to accommodate growth concerns.

Besides it remains to be seen how the new Modi cabinet tackle the GDP growth (which seems to have lost momentum of late), international crude oil prices movement, the inflation trajectory, and fiscal deficit as this affects the equities.

[Read: Will Modi 2.0’s New Cabinet Have A Positive Impact On Your Portfolio?]

Along with global macroeconomic factors; the US-china trade war, Brexit, changing regulatory goalposts in ecommerce and teething problems that hamper smooth implementation of new laws can impact the equities.

Amidst the macroeconomic uncertainties looming, the fortune of the Shriram Balanced Advantage Fund would closely be linked to how the fund manager plays the investment strategy in the endeavour to accomplish the stated investment objective.

[Read: Best Balanced Advantage Funds For 2019]

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