In this final column of the series on Balanced Advantage Funds (BAFs), we turn the spotlight on how to go beyond merely the optics of returns provided by the performance sheet and select that BAF which meets your objective as an investor.
Unlike most other categories, in the case of BAFs, there are no upper or lower limits set, either in terms of the asset class viz pure Equity nor are sub-categories defined for investments in pure equity. In short, the mandate is to dynamically manage BAFs, which means that each BAF offering can be unique in the way it is managed.
Hence, comparing the returns generated by BAFs with different approaches to the quantum of equity investing within dynamic management is akin to comparing the Test batting record of a swashbuckling batsman like Sehwag with that of a rock-solid batsman like Dravid.
Both have an excellent Test record, but the route they took to score the aggregate runs they eventually ended up with, was entirely different. Some BAFs have an average net equity level of around 60-65% over the past 3 years, which actually makes them more comparable to aggressive hybrid funds, given that they carry a higher degree of equity risk.
However, the product design of a BAF permits the Fund Manager to be nimble footed and switch between asset classes when the need arises, although there will be an Impact Cost to be borne. HDFC BAF is a good example. It has the largest AUM in this space, of R64,319 crore. Its recent Asset allocation mix before the market correction commenced was nearly 58% in equity, 11% in arbitrage and 31% in debt. Its top equity holdings are in the banking, finance, and IT software sectors.
On the other hand, there are BAFs with net average equity levels around 45-50% over the past 3 years. These BAFs follow a more conventional approach and work on the objective of insulating and growing the portfolio in the midst of volatility. ICICI BAF, which was the first to launch in this space, is a good example. It has an AUM of R49,976 crore. Its Asset allocation mix ahead of the recent market correction was 37% in equity, 28% in arbitrage and 35% in debt. Its top equity holdings are in the automobiles, banking and cement sectors.
This fund has stuck to its objective of being anti-cyclical and conservative to try and ensure lesser downside risk in adverse market conditions.Over the last few years, there has been a spate of BAF NFOs and while most start off following the conventional conservative model, peer performance pressure has led to periodic iterations. Hence, this is one category where an investor needs to be doubly sure of their objective and risk tolerance limit before committing their funds.
Ashok Kumar
Head of LKW-India.
He can be reached at ceolotus@hotmail.com
(Views expressed here are personal)