Balanced Advantage Funds: Are They Living Up To The Promise In The Current Volatile Markets?

Dynamic Asset Allocation or Balanced Advantage Funds are supposed to be winners when markets correct. Till 12 July 2022, the average return from a basket of 25 BAFs, is minus 3.5 percent YTD. Though negative, it is better than negative 6.7 percent of Nifty YTD.

The stock markets are volatile now. The last time the market was this volatile was in 2020. At that time, we had shared our thoughts through a piece on 28 July 2020  titled “Scorecard of balanced advantage funds: Winners when markets correct, laggards in rallies”. So, how does the scene look now? Year-to-date (YTD) till 12 July 2022, Nifty is down 6.7 percent. Though it is not a fair to compare Nifty with Balanced Advantage Funds (BAFs) which have only a partial equity exposure, it does provide a perspective anyway. We had mentioned earlier that Dynamic Asset Allocation or Balanced Advantage Funds are supposed to be winners when markets correct. Till 12 July 2022, the average return from a basket of 25 BAF funds, as shown in the table below, is minus 3.5 percent. Though negative, it is much better than negative 6.7 percent.

So, on the face of it, it does look worth it. Now, let us recap the concept of BAF. SEBI’s fund management norms say funds in this category should do ‘Investment in equity / debt that is managed dynamically’. Since this is ‘dynamic’, by definition, there is flexibility for the AMCs in managing the funds.

Some fund houses used to offer similar investment strategies in hybrid funds much before SEBI formally carved out the BAF category in the categorization measures announced in October 2017.

Those older funds have now been shifted to the current BAF category. How does this category work now? The usual strategy is that the fund has majority exposure to equity — at least more than 65 percent of the portfolio — to be eligible for equity taxation. The balance is invested in debt. In the equity component, while there is the ‘long’ exposure, i.e. purchase of stocks in the portfolio, there is a ‘short’ exposure too, where some of the stocks have been sold in the stock futures segment.

The long and short of it

Let us take an illustration. Let us say a BAF has a corpus of Rs 100. Of this, Rs 80 is in equity, referred to as the ‘long’ position earlier, and Rs 20 in debt. The fund manager is of the opinion that the equity market is richly valued and intends to reduce the effective equity exposure. Accordingly, the fund manager goes ‘short’ on say, half the equity exposure, i.e. takes a sell position of Rs 40 in the stock futures market. The implication of the move is that equity price volatility, either favourable or unfavourable, is cancelled out for half of the equity exposure. The fund has 80 percent long and 40 percent short exposure. Hence, 40 percent is the net long equity position. You would ask, how does that help? It helps in two ways. One, for the unfavourable volatility, i.e. share prices coming down, you are protected 50 percent in this example. Two, provided the fund manager’s calls are correct, the effective equity exposure (net of short position) is increased when equity valuations are attractive. The protection (i.e. short position or debt allocation) is increased when equity valuations are stretched. The concept is like driving speed; on good roads you increase the speed, and on bumpy roads you go carefully.

The strategy

How should you pick and choose your BAF fund? For most of the funds in this category, there is a track record of about four years since implementation of the SEBI norms in April-June 2018. Hence, we have shown 3- and 5-year performances, not older data. The pioneer in this concept is ICICI Prudential BAF, which was initiated in December 2006, and has delivered good investor experience across bull and bear phases. The category, with participation of other funds shown in the table, evolved along with SEBI’s fund norms since April-June 2018. The table shows the performance, sorted in order of YTD performance, which was mentioned earlier.


If you think the strategy of modulating the net equity exposure in BAFs works for you, you need to zero in on the funds for your allocation. The parameters are the strategy followed and track record. The method followed by different AMCs for modulating the effective equity exposure is varied. The market parameters used are Price to EPS, Price to Book Value, momentum, trend, volatility, dividend yield, earnings yield, market cap to GDP ratio, etc. Some AMCs have a more objective strategy where the output of the model followed by them, which is a combination of the factors mentioned above, decides the net equity exposure. At others, it is a fund manager-driven approach, where the fund manager decides the effective equity exposure on his/her reading of the market. Yet others would have a strategy combining objective (model-driven) and subjective (fund manager driven).



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