The balanced advantage funds/dynamic asset allocation funds (BA/DAA) category has 25 schemes already with ₹1.8-lakh crore in assets. These products are useful for investors with moderate risk appetites and help contain downsides during market corrections. After a lull, the debt fund-crisis-hit Franklin Templeton (India) is rolling out a Balanced Advantage Fund (FIBAF). The NFO will be open from August 16 to August 30.
Will FIBAF be any different from peers that have been around for a long time? Here is a lowdown.
What is it?
The Franklin India Balanced Advantage Fund seeks to offer tactical allocation between equity and debt, based on market valuations and fundamental factors-driven views. A formula-driven approach will drive the fund’s investments, which can help negate the behavioural biases caused due to greed and fear.
All BAF/DAA funds have some common threads given the same mandate; but there are personalised tweaks done to differentiate themselves.
One, they use a model or set of valuation indicators to assess the attractiveness of the stock market. FIBAF will use a mix of quantitative and qualitative factors to determine equity asset allocation. Unlike peers such as Edelweiss BAF that follow a pro-cyclical model, FIBAF takes a counter-cyclical approach. So, there will be an increase in equity allocation by reducing debt allocation in falling markets and a reduction in the equity portion in rising markets.
Under its quant framework, month-end weighted average P/E ratio and P/B ratio of the Nifty 500 index (trailing), combined in the weightage of 50:50 ratio will be taken. Recent fund launches such as Mirae Asset BAF use a combination of P/B and P/E valuations of Nifty 50 TRI.
The portfolio will be rebalanced in the first week of the following month.
Two, BAF/DAA funds fix the extent of hedging through stock and index futures. High unhedged equity exposure makes funds more prone to market swings and leads to poor downside containment abilities during corrections. At any point, if the equity allocation falls below 65 per cent, FIBAF's gross equity exposure will be maintained using equity derivatives. The fund is eligible for equity taxation if the allocation to equity asset class is above 65 per cent for the year.
Three, on the debt side, some BAF/DAA funds take credit risk and have historically held lower-rated papers, primarily in the AA and AA-buckets. FIBAF will look at investment-grade instruments across government, corporate, PSUs, NBFCs, Banks and other issuers. It endeavours to have over 80 per cent of the fixed income portfolio in AAA-rated papers, but there will be a high credit strategy tilt while not going below AA.
Four, in terms of portfolio management, Franklin India Balanced Advantage Fund will adopt a flexi-cap approach for equity allocation, which provides greater elbow room. It will follow a blend of growth and value in terms of investment styles. Larger peers such as ICICI Pru BAF are also flexi cap. Do note there is large-cap bias in equity portfolios of all BAF/DAA funds, with 49-67 per cent allocation. FIBAF also intends to have 65-75 per cent in large-caps.
How BAFs have performed
The category average numbers paint a complex and somewhat distorted returns picture. On a one-year basis, the returns vary between -0.30 per cent and 16.4 per cent. On a three-year basis, returns range from 7.6 per cent to 17 per cent CAGR. On a five-year basis, the gain spectrum starts from 4.8 per cent to 11.4 per cent CAGR.
Let us take the latest episode of downfall and recovery in the Sensex. From mid-October 2021, the index fell over 16 per cent till mid-June 2022. During this time, almost all the BAF/DAA funds beat the market, but the best one had gained 1.8 per cent, while the worst fell 16 per cent. In the subsequent recovery — 15 per cent gain for Sensex, the BAF/DAA funds’ rise has been between 5 and 12 per cent. Simply put, funds that are more aggressive have the potential to deliver higher returns during upswings. Given their hedging and ability to tweak portfolios to market scenarios, BAF/DAA do not fall as much as hybrid aggressive funds. Downside capture ratios tend to be between 50 per cent and 80 per cent.
The indicative total expense ratio (cost to investor) for FIBAF is about 2 per cent for regular plans.
Because this is an NFO from Franklin Templeton, investors must monitor a few things. The crisis that six FT debt mutual funds ran into may have blown over as five out of six schemes have returned over 100 per cent of the AUM at the time of winding up. Four schemes have liquidated all performing assets. Still, maintaining a watch on the debt allocation will be important, especially given that interest-rate cycle has turned the other way.
The house already runs a Franklin India Dynamic Asset Allocation Fund of Funds (launched in 2003). That old fund is ranked third in one-year returns, sixth in five-year returns, and fifth in both seven- and 10-year returns. In the three-year period, it ranks a lowly 17th. Investors can wait and watch for performance evidence in the new fund.