In the 2011 Test series in England when the Indian cricket team received a 5-0 drubbing, Rahul Dravid was the ‘last man standing’, scoring multiple centuries. He had also anchored Test wins in Australia and Pakistan in the decade before that with a couple of memorable double centuries. More recently, it was Cheteshwar Pujara who anchored in a historic win against the Australian team, Down Under.
The underlying point is that defence, rather than senseless aggression, is an option worth exercising at appropriate moments. This fact is as true while investing as it is on a cricket field. Historically, in the portfolios of our clients with substantial equity exposure, we have made it a point to suggest the inclusion of Gold Fund of Funds or ETFs as an inbuilt hedge. In recent years, we have also used Balanced Advantage Funds (BAF), which are inherently open-ended dynamic asset allocation funds, to temper equity aggression.
The corpus of a BAF is allocated dynamically to equity and debt securities, based on certain pre-determined market valuation and analysis tools. Mind you, comparing the performances of BAFs offered by different Asset Management Companies is not as straightforward as some other categories as the primary parameters may not be uniform. While some use the Price to Earnings (P/E) Ratio, some 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 per cent in pure equity and 33 per cent in arbitrage to keep gross equity investments around 65 per cent, while keeping the rest in debt securities. Their long-term gains are hence taxed as Equity Funds at 10 per cent and not as Debt Funds at 20 per cent (with indexation).
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.
It is by no means a fool-safe, or for that matter very safe, investment avenue; however, it can be considered by those investors who wish to calibrate their pure equity exposure with a relatively safer, albeit lower, return-generating product on the upside, but a safety net on the downside. To put matters in perspective, it would suffice to note that while the average fall in the large-, medium- and small-cap categories of funds in the last three months has approximated around 35 per cent, in the BAF category, it has been around half of that.
Even so, reiterating my earlier point that comparison of BAFs that do not use the same base tools would lead to somewhat erroneous conclusions, in the next fortnight’s column we shall proceed to take a closer look at a few BAF products that seem to have fared marginally better in more recent times when the markets tumbled like nine pins.
Ashok Kumar heads LKW-INDIA. He can be reached at ceolotus@hotmail.com