Just months after crossing the 50,000 mark, the S&P BSE Sensex is targeting its next milestone of 60,000 index level.

Amid the sharp rally in the equity market, the valuations have turned expensive and the margin of safety has narrowed. Consequently, investors have become wary and are shifting their focus to safer avenues. According to AMFI data, inflows in equity mutual funds have dipped sharply in August 2021 as compared to the previous month.

On the other hand, hybrid mutual funds have witnessed massive inflows led by SBI Mutual Fund’s new fund offer (NFO) for SBI Balanced Advantage Fund. In fact, SBI Mutual Fund mobilised Rs 14,551 crore through its Balanced Advantage Fund. This is the highest amount ever for any open-ended equity-oriented scheme during the NFO period.

The equity markets are at an all-time high and the yields from fixed income instruments are at a multi-year low. This environment has made it challenging for investors to build a robust mutual fund portfolio. Therefore, investors are looking at avenues that can generate inflation-beating returns and mitigate the risk of any potential drawdown in the equity market.

Balanced Advantage Fund serves this purpose and has attracted the interest of investors and mutual fund houses alike. Close on the heels of the launch of SBI Balanced Advantage Fund, NJ India Invest, the new entrant in the mutual fund industry, will soon launch its NFO for Balanced Advantage Fund. LIC Mutual Fund has also filed papers with SEBI for a Balanced Advantage NFO.

What are Balanced Advantage Funds?

Balanced Advantage Funds are hybrid mutual funds that dynamically allocate assets between equity and debt based on the prevailing market conditions and outlook. This makes Balanced Advantage Funds different from other hybrid mutual funds such as Aggressive Hybrid Funds and Conservative Hybrid Funds that follow a static asset allocation model.

The fund managers use parameters such as macro-economic view, valuations, corporate earnings, interest rate view, inflation, etc. to allocate assets between equity and debt. So if a Balanced Advantage Fund anticipates equity markets to turn expensive, it will trim the allocation exposure, while simultaneously increasing its allocation in the debt segment.

Most Balanced Advantage Funds invest minimum 65% of its assets in equities to benefit from the favourable tax treatment that equity-oriented mutual funds enjoy. During overvalued markets, Balanced Advantage Funds maintain the equity allocation by using hedging techniques (arbitrage opportunities) to lower the risk.

What are the benefits of investing in Balanced Advantage Funds during a market high?

During a market high, many investors face the dilemma of staying invested in equities in anticipation of further gains or to book profits because there is a possibility that the market may consolidate. When you invest in a Balanced Advantage Fund, you do not have to worry about timing your investment in equity and debt.

Investors in this category benefit from the expertise of mutual fund managers who have a better ability to forecast the market movement and accordingly shift allocation between asset classes. This means that Balanced Advantage Funds are actively managed.

Furthermore, when you redeem investments to rebalance the allocation between equity and debt, it has tax implications. Since Balanced Advantage Funds have asset allocation built in its strategy, rebalancing happens in a tax-efficient way.

Balanced Advantage Funds can offer better protection from downside compared to pure equity funds and aggressive hybrid funds, particularly in case of a severe market crash. As mentioned earlier, Balanced Advantage Funds achieve this by reducing exposure to equities and simultaneously increasing exposure to debt.

Similarly, if the fund managers expect the market conditions to be favourable for growth in equities, they have the flexibility to maintain or increase their equity exposure.

Thus, Balanced Advantage Funds are also known as ‘all-season funds’ that aim to perform well during both upside and downside market conditions.

Table: How have Balanced Advantage Funds performed?

Scheme Name Absolute (%) CAGR (%)
1 Year 2 Years 3 Years 5 Years 7 Years
Edelweiss Balanced Advantage Fund 34.64 24.98 16.75 14.49 12.37
Union Balanced Advantage Fund 23.89 18.59 14.49
Kotak Balanced Advantage Fund 23.24 17.41 14.33
Aditya Birla SL Balanced Advantage Fund 31.37 18.21 13.98 11.94 11.62
HDFC Balanced Advantage Fund 50.44 19.20 13.51 12.64 11.48
ICICI Pru Balanced Advantage Fund 26.20 16.15 13.08 11.64 11.75
Nippon India Balanced Advantage Fund 29.68 17.20 13.03 12.29 11.01
IDFC Balanced Advantage Fund 24.01 17.69 13.00 11.56
DSP Dynamic Asset Allocation Fund 20.83 14.75 12.99 10.22 10.27
Axis Dynamic Equity Fund 28.20 15.31 11.37
CRISIL Hybrid 35+65 – Aggressive Index 36.48 21.80 15.69 13.85 12.60

Data as on September 20, 2021
Returns are point-to-point. Direct Plan – Growth option considered
(Source: ACE MF) 

Who should invest in Balanced Advantage Fund?

Mutual fund distributors often promote Balanced Advantage Funds as a monthly income option for retirees and other conservative investors. However, it is important to note that they do not offer assured or regular returns/dividends. And with a major portion invested in equities, Balanced Advantage Funds can be susceptible to high volatility. This makes it suitable only for investors with a moderate to high risk profile and an investment horizon of at least 3-5 years.

Investors unsure about when and how much allocation should be shifted between equity and debt can consider investing in Balanced Advantage Funds. It can also be beneficial if you are looking to make a lump sum investment during uncertain market conditions because the scheme will decide the appropriate mix of equity and debt at all times.

If you want to earn a regular income from Balanced Advantage Fund, opt for a systematic withdrawal plan (SWP) to regularly withdraw money at set intervals.

How to select the best Balanced Advantage Fund?

Each Balanced Advantage Fund differs from the other in terms of asset allocation strategy. While some prefer to follow a conservative approach and utilise hedging techniques like derivative/arbitrage more frequently, other fund houses may steer towards a more aggressive approach. This can have a direct impact on the performance and the risk profile of the scheme. The success of a Balanced Advantage Fund depends on its ability to timely shuffle allocation between equity (hedged and unhedged) and debt.

Here are the quantitative as well as qualitative parameters to look into when selecting the best Balanced Advantage Fund in 2021:

  • Analyse the fund’s consistency in performance across various market periods (bull and bear market phases) compared to the benchmark and category peers.
  • Assess whether the fund fares well in terms of risk-reward matrix by evaluating ratios such as, Sharpe Ratio, Sortino Ratio, and Standard Deviation, etc. over a 3-year period.
  • Check if the equity portion is well-diversified at the stock and sector level.
  • The fund’s debt portfolio should be invested in high quality liquid papers such as government securities and papers issued by public sector entities that carry low credit risk.
  • The mutual fund house should have a significant performance record and must follow robust investment processes with adequate risk management systems in place.
  • Check the qualification and experience of the fund manager, his/her investment strategy, and the track record of the other schemes they manage.

Ideally, you should avoid investing in an NFO because it does not have a proven track record of performance and risk-reward matrix. This makes comparing and picking the right scheme within a particular category difficult.

Moreover, when you invest in NFOs, there is no reliable track record of portfolio characteristics such as asset allocation, market cap bias, sectoral allocation, rating allocation (in case of debt mutual funds), portfolio churning, portfolio concentration, etc. that can help you understand the risk involved.

Therefore, give preference to only best Balanced Advantage Mutual Funds that have a proven track record of generating consistent returns at reasonable level of risk.

This article first appeared on PersonalFN here

Leave a Reply

Your email address will not be published. Required fields are marked *