The youthful bravado of Rishabh Pant, Mohammed Siraj and Washinton Sundar was nicely tempered and balanced by the experience and patience of Ajinkya Rahane, Cheteshwar Pujara and Ravichandran Ashwin during the Indian cricket team’s historic Test series win earlier this year. Therein lies the message that it is necessary to blend caution with aggression and respond appropriately based on the situation.
The same principle applies even while investing in mutual funds. I remember meeting a senior personnel of an international Asset Management Company (AMC) more than a decade ago. Over a leisurely lunch, he expressed his surprise at the relatively limited exposure Indian mutual fund investors had in hybrid mutual funds. I had opined that it was merely a matter of time before the transition would take place as the industry was evolving rapidly.
Soon thereafter, Balanced Funds (now renamed 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.
In more recent years and post the creation of this new category of hybrid funds around half a decade ago, Balanced Advantage Funds (BAF) 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 to equity and debt securities, based on certain predetermined market valuation and analysis tools. Some AMCs use the Price to Earnings (P/E) Ratio while 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 at or above 65 per cent while investing the rest in debt securities. Their long term gains thus attract equity taxation of 10 per cent as against debt taxation of 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. To put matters in perspective, it is worth noting that the average fall in returns in the BAF category was around half of that of the large, medium and small cap categories of funds when the markets slipped hard during March and April a year ago. Well, this is Part-1 of the series. In next fortnight’s column we shall proceed to take a closer look at some of the BAF products on offer from AMCs, their dynamics and performances.
Ashok Kumar
Head of LKW-India. He can be reached at ceolotus@hotmail.com