Mutual fund investors are preferring hybrid funds amidst volatility in equity markets. One of the key categories in hybrid fund arena is the balanced advantage/dynamic asset allocation space, and this club has a new entrant: Bajaj Finserv Balanced Advantage Fund (BAF).

Bajaj Finserv Asset Management has launched a new open-ended dynamic asset allocation fund for investors seeking hybrid portfolios i.e. equity and equity related instruments, including derivatives, and fixed income instruments.

With around 30 schemes already jostling for investor’s attention, here is all you need to know how Bajaj Finserv BAF going to be different in its asset allocation model and investment strategy. The new fund offer will close for subscription on December 8, 2023.

BAF genesis

As per SEBI regulations, BAF/DAA schemes are required to their investments in equity and debt dynamically. The funds employ an in-house model or a set of valuation indicators to assess the appeal of the equity market. Utilising this information, the fund determines the level of hedging through derivatives, the portion of equity exposure to remain open (unhedged), and the allocation to debt.

The BAF category is led by popular funds such as HDFC Balanced Advantage, ICICI Pru Balanced Advantage, SBI Balanced Advantage, and Kotak Balanced Advantage. In the past two years, there have been around nine new BAF launches from fund-houses such as UTI, Quant, WhiteOak, Franklin, Mirae, Mahindra.

BAFs are suitable for investors with varying investment horizons, from one year to very long tenures.

BAFs that maintain an equity exposure of at least 65 per cent qualify for equity taxation, potentially offering tax benefits. While they cannot completely replace debt allocation, they can reduce debt allocation requirements and enhance overall tax efficiency of your portfolio.

Bajaj Finserv BAF model, strategy

Model: Bajaj Finserv BAF uses an investment model which combines an approach of behavioural sciences and financial insights. Rather than using only quantitative models to decide allocation, the Bajaj Finserv AMC investment team aims to analyse behavioural aspect as well. The use of behavioural science models will play a role in deciding on asset allocation and timing of investments.

The Bajaj Finserv AMC BAF model estimates the fair market value based on future earnings per share, growth expectations, and interest rates, guiding the core investment strategy. The fund’s behavioural indicator helps navigate market volatility and optimise returns by fine-tuning entry and exit points. It also guides equity allocation, increasing it when the market is undervalued and reducing it when it’s overvalued. Thus, Bajaj Finserv BAF will mostly adopt a counter-cyclical approach.

The BAF will rebalance its portfolio on a month-on-month basis.

The unhedged equity portfolio construction of the fund is based on INQUBE’ investment philosophy which seeks to combine AMC’s Informational edge, the Quantitative edge and the Behavioural edge to generate competitive performance.

Strategy: Bajaj Finserv Balanced Advantage Fund’s primary equity strategy is to build a portfolio of high-growth companies which may have achieved reasonable scale or size. The portfolio approach will be flexi-cap (i.e. no restriction or minimum allocation to any specific m-cap) but preference will be towards large-cap stocks. This is not different to BAF/DAA category where large-cap allocation is about 50 per cent.

The fund aims to adopt a sector-agnostic approach. Additionally, it may explore arbitrage opportunities within the Indian equities market.

The debt investment strategy focusses on capturing term and credit spreads and maintaining a balance between safety, liquidity, and return aspects of various investments. Preference is for short- to medium-term duration and highly rated securities and thus, fits the overall role of anchoring and supporting core performance (from equities).

The investment portfolio of the scheme would reflect moderate to high volatility in its equity and equity related investments and low to moderate volatility in its debt and money market investments.

The AMC’s portfolio management style is conducive to a low portfolio turnover rate. But, one has to wait to know how it pans out over 2-3 years.

The fund will be jointly managed by Nimesh Chandan and Sorbh Gupta on the equity side, and Siddharth Chaudhary on the debt side.

Our take

BAFs emerge as a prudent choice for investors seeking to navigate market volatility while potentially capturing equity upside. We believe the primary aim of this fund category should be to limit volatility and shield from downsides during market corrections. Our bl.portfolio Star Track MF ratings assign 4-5 stars ratings to Edelweiss Balanced Advantage, ABSL Balanced Advantage and ICICI Pru Balanced Advantage. So, we prefer them over others.

While Bajaj Finserv BAF’s investment model which combines an approach of behavioural sciences and financial insights appears interesting, we wait to see its actual results.

If you believe Bajaj Finserv BAF can give you relatively decent returns but with lower risk compared to existing funds, you can consider it.