Safe-bet BAFs take the back seat as investors turn to riskier funds

Outflow not huge but the traction seen in the later part of 2021 is waning, shows data

Balanced advantage funds (BAFs) were popular in the later part of 2021 and continued to see good inflows until some months back as investors looked for safer options amid over-valuation concerns. As such concerns ease, investors are turning to riskier funds and shifting from BAFs. Redemptions from the hybrid fund category have exceeded in six of the last seven months, with investors pulling out a net of Rs 3,140 crore during the seven-month period.

Monthly inflows into the riskiest mutual fund (MF) products—small-caps and thematic funds—have surged. The two fund categories have consistently beaten others in terms of monthly net inflows since October 2022. Between October and April, small-cap and sectoral funds have drawn a net investment of over Rs 12,000 crore each. At the same time, flexicap and large-cap funds received net investments of Rs 3,900 crore and Rs 1,100 crore.

"Majorly, it's behaviour driven. You will notice that the drop in interest in BAF started at the end of last calendar year when the macroeconomic variable started falling in place. (The) Narrative had started to become optimistic in terms of domestic recovery. At the same time, there was a surge in inflows into riskier funds like thematic and small-caps," said Nirav Karkera, head of research at Fisdom.

"People want to outsource the management of their portfolio when the times are tough, and do it themselves when they are confident," he said.

BAFs are seen as a safer option due to the flexibility they give fund managers to shift assets between equity and debt depending on market conditions. They provide downside protection while participating meaningfully during a market rally.

While the outflow is miniscule compared to the total assets under management in BAFs, it does indicate waning investor interest, especially when compared to the inflows in preceding months. In Financial Year 2021-2022, the hybrid fund category received average monthly net inflows of Rs 4,750 crore.

Inflows into BAFs and the Nifty50's price-to-earnings ratio are correlated. Inflows were the highest during the August-November 2021 period when the valuations had peaked (PE ratio in the 30-32 range). BAF outflows happened when valuation was at the lowest level in the last two years.

Other than the improved valuations and macro-economic environment, senior MF distributors attribute the outflows to a rise in bank fixed deposit (FD) rates, dissatisfaction with some of the schemes and a decline in equity valuations.

"The buzz around BAFs in 2021 might have attracted new investors, some of whom might be moving back to FDs with the rise in rates," said Anand-based senior MF distributor Nikhil Thakkar.

The traction for BAFs in the later part of 2021 was driven by over-valuation concerns after the market had enjoyed an extended run-up. It was fueled by a new fund offering (NFO) from the largest fund house SBI MF. With valuations improving significantly due to a time correction, equity-oriented schemes are back to drawing higher investor interest.

The other change in investment pattern affecting flows to BAFs is the dip in lump sum investments in MFs. According to MF distributors, BAFs and other hybrid schemes attract the majority of the inflows through lump sum investments. Data shows that lump sum inflows into equity and hybrid schemes were in the negative territory in most part of FY 2023. The inflows have mostly been supported by systematic investment plan (SIP) inflows and collections by NFOs.

Month	Net inflows (Rs crore)	Nifty PE ratio
Apr-21	1700	29.0
May-21	1363	29.8
June-21	2057	30.1
July-21	2454	29.0
Aug-21	16571	31.4
Sept-21	5234	32.3
Oct-21	11219	31.6
Nov-21	6094	29.8
Dec-21	3706	30.4
Jan-22	2763	30.4
Feb-22	2118	23.8
Mar-22	1719	24.6
Apr-22	1543	24.1
May-22	2248	22.7
June-22	1799	21.8
July-22	554	23.0
Aug-22	851	23.8
Sept-22	525	22.9
Oct-22	-454	24.1
Nov-22	-1594	24.8
Dec-22	-413	23.9
Jan-23	-218	23.3
Feb-23	57.81	21.0
Mar-23	-444.37	21.0
Apr-23	-71.15	22.2

Source: Bloomberg | Amfi

Compiled by BS Research Bureau