Be it cricket or investing, the lessons learnt on either field, are often similar. Just as a cricket team comprises good batsmen and good bowlers, their performances often pivot around the middle that comprises ‘all rounders’, who can both, bat and bowl. Investing in many ways is no different and Balanced Advantage Funds (BAFs) offered by mutual funds are the investment equivalents of all-rounders.
The underlying theme that emerges is that be it the cricket field or that of investments, it is necessary to blend caution with aggression and respond appropriately based on the situation. In the past, Balanced Funds (now renamed Aggressive Hybrid Equity Funds) gained in popularity and rewarded investors seeking the risk profile it offered, fairly well. But the fact remained that with no upside equity holding restriction, some AMCs were running it literally like a pure equity fund thus exposing investors to higher risk than they had signed up for. SEBI’s classification of funds helped address this issue to an extent.
But, post the creation of this new category of hybrid funds almost a decade ago, Balanced Advantage Funds (BAFs), which are inherently open-ended dynamic asset allocation funds, have also become popular. It seeks to use time-tested mechanisms using a hybrid investment model to capture equity upsides even while casting a safety net on the downside.
The corpus of a BAF is allocated dynamically between equity and debt securities, based on certain pre-determined market valuation and analysis tools. Some AMCs use the Price to Earnings (P/E) Ratio while others use the Price to Book (P/B) Ratio as their base for determining the asset allocation mix. Then there are some that use a kind of hybrid model, incorporating both, boosted further by trend analysis.
For the sake of easier comprehension, let us assume that a BAF starts off by investing 33 percent in pure equity and 33 percent in arbitrage to keep gross equity investments at or above 65 percent while investing the rest in debt securities. Their long-term gains thus attract Equity taxation of 12.5 percent as against Debt taxation of the tax rate applicable to the total income of the investor.
However, like any other Dynamic Asset Allocation Fund, BAFs too have the flexibility to dynamically shift the corpus from equity to debt and vice-versa. The underlying theme though is to seek capital appreciation, while guarding against volatility.
To put matters in perspective, it is worth noting that the average fall in returns in the BAF category has usually been around half of that of the large, medium and small-cap categories of funds whenever the markets have slipped in recent times. Mind you, this is what the data shows, but by no means is any guarantee of how similarly they will fare going ahead. It is thus worth looking at the historic asset allocation of a BAF and matching its suitability to one’s investment objective before investing in it.
(Ashok Kumar heads LKW India. The views expressed here are his own)