Mutual Funds

Why ICICI Pru Balanced Advantage is a good bet for volatile times

Kumar Shankar Roy |BL Research Bureau | Updated on: Jun 14, 2022

It offers relatively moderate returns but with lower risk 

If you are worried about rising market volatility, ICICI Pru Balanced Advantage (ICICI Pru BAF) is a fund that can be your go-to choice given its established track record of deftly juggling equity and debt in line with changing market conditions. Retail investors with a three-five year investment horizon can take exposure to this 15-plus year-old hybrid fund, which uses a price-to-book based model (since March 2010) to deliver hassle-free asset allocation that results in reduced short-term volatility in returns. ICICI Pru BAF is also tax-efficient as equity-debt reallocations at the fund level have no tax implications compared to the potential capital gains taxes if you undertake the same exercise on your own.

Game plan
The fund-house believes that a momentum-based strategy would not necessarily provide a rewarding experience for investors over the long term

Strategy

The strategy of ICICI Pru BAF is said to have evolved as a result of the investor experience faced between 2007 and 2009. Investors chose to invest in 2007, stayed away in 2008, and this led to them missing the ensuing rally in 2009. ICICI Pru BAF follows a counter-cyclical approach to investing, which is achieved through its in-house model that is predominantly based on price-to-book with other select factors. This model has been in use for more than a decade now. The fund-house believes that a momentum-based strategy would not necessarily provide a rewarding experience for investors over the long term.

When market valuations are at a high, the fund usually hedges a part of its equity exposure and also ups its debt holdings, thereby limiting the impact of a market fall. In the same vein, the fund does not hesitate to invest aggressively in equities when market valuations are at a low. The fund uses a blend of large- and mid-cap stocks, with net equity levels at 35 per cent as on April 30, 2022. The net equity level has historically been in a range of 30-80 per cent. The fund takes derivative exposure for hedging/portfolio rebalancing purposes. In debt, it puts money largely in shorter-tenure papers, maturing in less than a year or one-three years, which caps interest rate risk but doesn’t shy away from investing in below AAA-rated papers, bringing in some risk.

Performance

In terms of historical point-to-point performance, ICICI Pru BAF is among the very few that has comprehensively beaten the category average across all short-term periods such as one month, six months and one year, as well as longer periods such as three years, five years and 10 years. Thus, it is a rare top quartile performer across various time periods, which serves as a validation for the fund's consistency and asset allocation strategies.

During over a dozen flattish phases, of at least one year duration, when Indian markets have given zero returns, ICICI Pru BAF has given 8-10 per cent returns in the same periods. During market fall years of FY12, FY16, FY20, the fund has capped downside and this is also seen its low three-year downside capture ratio of 48 per cent. In comparison to Nifty 50 TRI that has 100 per cent equity allocation, the hybrid fund (between April 2010 and April 2022), on an average, has added an alpha of 0.021 on a daily basis with a beta of only 0.52. This is also brought out by the fact that in both three- and five-year rolling return periods, ICICI Pru BAF has shown 6 per cent and 3 per cent negative observations compared to Nifty's 15 per cent and 5 per cent respectively.

In a nut-shell, the fund generally gives relatively moderate returns but with lower risk (standard deviation), compared to riskier pure equity fund categories.

Published on June 11, 2022
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