Balanced advantage funds rise on MFs' popularity charts

Equity-oriented dynamic asset allocation funds make up nearly a fifth of the balanced category

Equity-oriented funds with an in-built dynamic asset allocation are the new emerging category in the growing mutual funds industry. With India's stock markets at record highs, a trend is being seen among investors opting for schemes that offer asset allocations, largely known as balanced funds.

However, within the balanced category of funds, the subset of balanced advantage funds, which are largely open-ended equity-oriented schemes, are putting on a strong show. Since these schemes allocate funds to equity and debt instruments and arbitrage on a daily basis, given the market levels, they cushion investors from volatility. Plain balanced funds, on the other hand, stick to a fixed allocation to different asset classes and do not change it.

Currently, there are four schemes in this particular category and experts believe more may be available as traction among investors has been high. ICICI Prudential Balanced Advantage Fund leads the category with a massive size of over Rs 20,000 crore. The fund house was first to realise this opportunity and gained the first-mover advantage.

Others competing in this category include Aditya Birla Balanced Advantage Fund (Rs 1,745 crore), DHFL Pramerica Balanced Advantage Fund (Rs 191 crore) and Edelweiss Balanced Advantage Fund (Rs 55 crore).

In terms of performance, balanced advantage funds have done reasonably well in the recent past. At a time when large-cap and multi-cap equity funds offered returns of 15-18 per cent, the average return offered by the four balanced advantage funds was 12.16 per cent, much higher than debt funds and bank deposits.

Dhirendra Kumar, chief executive of the mutual fund tracking firm Value Research, says, "Balanced advantage funds are the perfect schemes for conservative investors who fear market volatility. Returns are decent and stable. I would advise any new investors to mutual funds to start with such funds which have in-built risk mitigation capabilities. The funds keep changing allocation to equities and debt, which helps them navigate the risk associated with market volatility." 

When stock markets tend to trade higher and fund managers feel the level is overpriced, the equity portion of the portfolio goes down while investments in debt instruments increase. These funds can take the equity proportion of their assets under management to as high as 80-85 per cent and bring it down to 20 per cent.

This way, the onus of adding equity and debt is on the fund manager and investors are not required to decide when to book profits and when to invest more. These schemes are positioned for conservative investors who have little appetite for market volatility. Investors should not expect the high returns that equity schemes provide. Such schemes manage a decent return of 200-300 basis points more than what fixed deposits would make.

Nimesh Shah, CEO & MD of ICICI Prudential Mutual Fund, says, "Dynamic asset allocation funds have been created to address the fact that investors shy away from investing when markets are cheap and rush to buy when valuations are high. So these products tend to do the opposite – buy more equity when risk is low (low price to book value) and vice versa."

India's fund executives have learnt from the 2008 crisis that no investor wants a sudden and steep fall in the net asset value (NAV) of mutual fund schemes. They are of the view that since equities are the riskiest asset class and are bound to face volatility, it is also necessary to know when to exit equities and when to add equities into one’s portfolio to create more long-term wealth. Balanced advantage funds are an attempt in this direction. From the tax perspective, despite their changing equity allocations, such funds are treated as equity investments and are subject to capital gains tax.

Recently, Union Mutual Fund filed a draft scheme information document with the Securities and Exchange Board of India (Sebi) for a balanced advantage scheme. G Pradeepkumar,  CEO of Union Mutual Fund, says, "Such funds are expected to protect investors from market volatility. The fund will be predominantly equity-oriented but will change its allocation between equity and debt dynamically based on market levels with the objective of providing healthy risk-adjusted returns. It is difficult for investors to see falling NAVs; such funds are likely to arrest that risk to an extent."

Along with Union Mutual Fund, Axis Mutual Fund has filed its document for the category for Sebi's approval. Several fund houses are trying to launch their products in this category.