Be it football or investing, the lessons learnt on either field, are often similar. Just as a football team comprises forwards who are the attacking option and defenders who are the defensive line, in between them, there are also mid-fielders who are ‘all rounders’, that is they move forward to attack as well as fall back to defend. Investing in many ways is no different and Balanced Advantage Funds (BAFs) offered by mutual funds are the investment equivalents of mid-fielders.
The underlying theme that emerges is that be it the football 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 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, in more recent years and post the creation of this new category of hybrid funds more than half 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% in pure equity and 33% in arbitrage to keep gross equity investments at or above 65% while investing the rest in debt securities. Their long-term gains thus attract Equity taxation of 10% as against Debt taxation of 20% (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 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. In the next column, we shall proceed to take a closer look at some of the BAFs on offer, their current asset allocations and performance track records.
Ashok Kumar
Head of LKW-India.
He can be reached at ceolotus@hotmail.com
(Views expressed here are personal)