The balanced advantage fund (BAF)/dynamic asset allocation fund (DAAF) category has witnessed a slew of launches over the last year, as equity markets kept on moving higher towards uncharted territory. Joining the club is new AMC, SAMCO Mutual Fund with its SAMCO Dynamic Asset Allocation Fund (DAAF). Positioned as a DAAF that follows momentum model with capability to move to debt entirely in tough times, the fund appears different as asset allocation models of most of the other BAFs/DAAFs follow valuation models built on P/B, P/E, etc. The NFO commences on December 7, and concludes on December 21. Here is a lowdown.


Hybrid funds are not new. Hybrid funds have been marketed as an ideal product for those investors who have long been apprehensive of equity market declines. But, any hybrid fund with a decent level of net equity exposure will always be at a level of risk if stocks decline. BAFs/DAAFs solve the above problems. They are built to generate higher returns than debt instruments and traditional savings schemes, carry moderate risk (lower than direct exposure) and allow money to be redeemed in the times of need.

According to SAMCO MF, with a majority of BAFs/DAAFs increasing equity allocation in falling markets (based on valuation model), this is akin to catching falling knives. The fund-house says all major drawdowns happen in falling markets and an investor never knows how bad things can get and how low things can go. The Sensex, for instance, witnesses a 25 per cent drawdown (fall from peak) on an average every 3.5 years. And, every 10 years, there is a close to 50 per cent decline. With equity allocation being static at 50-60 per cent (5-year category average), many BAFs/DAAFs have fallen in sync with stock markets, making them stray from their intended mandate.

Model, approach

SAMCO DAAF aims to be a predominantly equity fund during momentum and up-trending markets. Substantial equity exposure (up to 100 per cent) in trending markets aims to deliver capital appreciation. On escalation of risk, this fund will aim to transform into a debt/arbitrage fund. Then, the risk-off mode will protect the downside. The sources of alpha are zero equity exposure in bear markets, 100 per cent equity in bull markets, alpha from mid- and small-caps, and momentum stock selection.

SAMCO DAAF will use its TRANSFORMER model. With the market moving in phases, the DAAF would like to be in equities when there is a break-out from Accumulation Phase (Phase I) and be out of equities when Distribution Phase (Phase III) breaks down. Its equity portfolio shall have 90-100 momentum stocks across large, mid, and small-caps. This model allows the fund to adjust its equity exposure from 0 per cent to 100 per cent based on market trends. By swiftly transitioning between equity and debt investments in real-time, the fund aims to mitigate risks and curtail drawdowns. Backtested data shows the model works, but investors should wait for live results.

As long as the stock market is up, SAMCO DAAF will have substantial equity exposure. If markets begin to enter bear zone, it would reduce equity exposure by selling futures of underlying shares of large-caps and some mid-caps, and small-caps will be sold in spot segment. Overall, fund’s underlying portfolio will have some 70 per cent futures on which it will make arbitrage income during bear markets while simultaneously providing protection against equity drawdown. This will also give equity taxation benefits to investors the fund will try to ensure an average-12 monthly equity exposure of 65 per cent. Once the mandated exposure in equities is taken care of, debt versus arbitrage would be chosen basis the optimal yield.

The optimal AUM size of SAMCO DAAF, when it can buy and sell without incurring high impact costs, at the current m-cap level is ₹5,000 crore.

For the debt investments, SAMCO DAAF will invest across the spectrum i.e. money market/SLR/non-SLR instruments. Duration calls will be actively managed. Credit quality and liquidity will be given paramount importance during portfolio construction. Attractive valuation and mispriced opportunities will be sought using the proprietary Equity-Debt missed-price opportunities model (EDMO).

SAMCO DAAF will be benchmarked to NIFTY Hybrid Composite Debt 50:50 Index.

Our take

BAF/DAAF category of funds emerges as a prudent choice for conservative-minded investors seeking to navigate market volatility while potentially capturing equity upside.

SAMCO DAAF’s promise of swiftly transitioning between equity and debt investments in real-time is interesting. Rebalancing based on the model shall happen on a real-time dynamic basis and will not follow a monthly/quarterly rebalancing model. If you believe this momentum-driven approach will work better than peers, you can consider investments in this new fund. Conversely, you can wait to see how the fund performs for 1-2 years before investing.

As highlighted in our Diwali Big Story, we prefer two top-rated BAF/DAAFs with different approaches. Edelweiss Balanced Advantage is a scheme with a pro-cyclical approach. ICICI Prudential Balanced Advantage, a pioneer of the BAF category, is known for its success with a counter-cyclical framework.