Balanced Benefits Funds are winning hearts; should we invest too?

Since this rebalancing is done using derivatives, they continue to be treated as equity funds for tax purposes and are therefore subject to long-term capital gains tax. 10% for holding periods longer than 1 year on capital gains ??1 lakh. According to Amol Joshi of Plan Rupee Investment Services, holding a BAF trumps its own allocation by investing separately in equity and debt funds for tax efficiency reasons. This is because buying and redeeming separate equity and debt funds results in capital gains tax, while the same action has no tax consequences if done in a BAF. In addition, there is a behavioral element. Investors can fall prey to greed in bull markets and fear of market lows and fail to rebalance. In a BAF, the investor takes this decision out of his hands and hands it over to the fund manager.

Let’s take a look at some popular approaches to managing BAF.

DSP AMC: DSP Asset Management Company takes a very conservative model-driven approach to its balanced benefit fund, with an emphasis on the price-to-earnings and price-to-book ratio. The fund manager does not exercise a lot of discretion. DSP BAF increased its allocation to equities following the market correction caused by covid-19 in April 2020, then reduced it in 2021. Its exposure to unhedged equities peaked at around 80% in May 2021, but the market continued to recover after that point. Currently, DSP BAF’s unhedged equity exposure is around 30% of the portfolio.

Cut: ??4 396 crores

Edelweiss BAF: Edelweiss BAF operates a “pro cyclical model”, also known as “momentum” in popular jargon. It uses technical indicators such as moving averages to follow the trend. This causes the fund to significantly outperform in bull markets such as the post-covid-19 rally. However, the inherent risk is that the model will fail when the market suddenly changes direction. Currently, Edelweiss BAF has a 60% unhedged equity exposure.

Cut: ??5,845 crores

Prudential BAF ICICI: Like DSP AMC, ICICI Prudential AMC also uses a counter-cyclical model. However, the program’s 4 fund managers, Sankanran Naren, Manish Banthia, Rajat Chandak and Ihab Dalwai, are taking active calls. The fund leaned into mid and small caps even as it increased its allocation to equities when the market suffered its first covid-induced correction. More famous still, she took bets on credit at a time when credit markets were booming and Franklin Templeton announced a shock liquidation of his schemes. Currently, ICICI Prudentuial BAF has an unhedged equity exposure of approximately 31%.

Cut: ??35,737 crores

HDFC Balanced Advantage Fund: The HDFC Balanced Advantage Fund, unlike most of its peers, maintains a relatively “static” model. It doesn’t make big mismatches between equity and debt through derivatives. Its unhedged equity exposure fluctuates between 65% and 80%. This keeps its returns high during bull markets, but it declines much more when markets fall.

Cut: ??43,247 crores

Despite their obvious advantages, FBAs have certain limitations. First, their expense ratios tend to be higher than what you can get by investing in segregated mutual funds in stocks and debt securities. Second, they tend to be large cap, equity-focused companies. Third, most BAFs do not take exposure to international equities or commodities like gold; restricting their ability to generate returns when Indian stocks and bonds fall. According to Radhika Gupta of Edelweiss, investors should supplement a BAF allocation with separate allocations to international feeder funds, for example. Fourth, industry insiders allege cases of abuse. Consistently low FD (fixed deposit) rates have spurred a hunt for yield and BAFs are sometimes sold as a “FD plus” product.

Finally, Neil Parikh, CEO of PPFAS Mutual Fund, believes that BAFs are not necessary because flexicap funds have sufficient leeway to invest in debt or cash according to Sebi rules. According to Parikh, if a flexicap fund invests up to 35% of its assets in cash, it can hedge another 50% equity exposure using derivatives. In 2017, PPFAS Flexicap consisted of 40% domestic equities, 30% foreign equities and 30% cash. “We wanted to build a Swiss Army Knife with this fund. It can go into foreign equities when they are attractive and in cash or in arbitrage (hedging) when they are not, up to 85% of the corpus. We don’t want to make life difficult for our investors by launching fund after fund. “

So far, BAFs have won the argument among investors with recent launches that have seen tremendous traction. The SBI Balanced Advantage Fund swelled to ??20,000 crore within 2 months of collection ??14,676 crore in its new fund offering in August. However, investors should fall into this category with various complexities in mind.