Mutual Funds

Should you subscribe to NFO of SBI Balanced Advantage Fund?

Kumar Shankar Roy BL Research Bureau | Updated on August 21, 2021

The intent of the fund is to contain volatility and protect downsides on market corrections

SBI Mutual Fund has launched its open-ended dynamic asset allocation fund, SBI Balanced Advantage. The new fund offer period ends on August 25. Like others in this category, the intent of the fund is to contain volatility and protect downsides on market corrections.

The balanced advantage fund (BAF)/dynamic asset allocation funds (DAA) category was created after SEBI’s new categorisation rules. Rules say these funds need to invest in equity/debt that is managed dynamically within a wide range of 0-100 per cent. But to target equity fund taxation, these hybrid funds usually maintain 65 per cent equity exposure on an average.

As such, the main differentiating factor among the two dozen funds in this versatile category is their respective in-house model that guides how schemes switch between equity, equity-linked derivatives and debt. Since each fund differs in its call on equity market direction, this reflects on the risks and returns too. Hence, investors should develop a nuanced understanding of the category before deciding to use the BAF/DAA route to fine-tune their asset allocation needs.

All-weather solution?

Given the superlative performance of equities over the last year or so, risk-averse investors are understandably even more edgy when it comes to going for pure equity funds and encountering sharp drawdowns. Asset allocation products such BAF/DAA schemes have a ready-made solution for this problem. They have the potential to navigate volatile markets through debt and cash exposure, while holding enough equity during good times to do better than fixed income alternatives. When markets are overheated, equity exposure is hedged more. Such funds offer the manager complete flexibility to manoeuvre assets in the range of 0-100 per cent across asset classes.

Typically, BAF/DAA funds do not invest entirely in equity, and hedge equity through derivatives and debt. The levels of debt, derivatives and unhedged equity are fixed based on the in-house models. SBI Balanced Advantage, for example, will use parameters such as sentiment indicator (breadth of the market, retail participation, mutual fund flows, primary market activities), valuations and earnings drivers. This will help it find the right asset mix.

Next, the fund will find the right strategy tilt in terms of market cap allocation, style skewness (value/growth/quality) and sector preference. This will be done using a quantitative framework. On the debt side, the fund plans to have high credit/sovereign portfolio to maintain liquidity while managing duration to generate alpha. The fund is benchmarked to CRISIL Hybrid 50+50 – Moderate TRI.

Past data on existing funds shows that the level of hedging and debt exposure varies widely among funds. It may not be possible to accurately know how much equity exposure will be taken. Aggressive funds witness higher volatility and steeper falls during market crash. Wrong asset allocation calls can lead to the double whammy of higher downside capture during falls and lower upside capture during the ensuing recovery.

Yet for all this, balanced advantage funds as a category have delivered higher returns than equity savings funds based on 1-, 3- and 5-year trailing as well as rolling returns. Given their ability to adapt portfolios to various market scenarios, balanced advantage/dynamic asset allocation fund category (3-year downside capture ratio of 60 per cent) will not fall as much as hybrid aggressive fund category (downside capture ratio of over 100 per cent) . It is important for investors to look at consistency in BAF performance over various time periods before choosing one.

Word of caution

Balanced advantage funds are often marketed to senior citizens and conservative investors as a safe income option. SBI Balanced Advantage provides a Systematic Withdrawal Plan (SWP) to investors who need regular cash flows. Under its SWP(A) facility, investors can withdraw a fixed per cent of their investment (0.5 per cent a month or 6 per cent a year) or any specified amount (minimum amount is greater than ₹500) to meet regular cash flow needs.

SWPs work great when a person has invested and accumulated a significant sum. It may not be prudent to withdraw systematically early on if a fund is volatile, because you may end up eating up the principal. Also, withdrawals from equity/debt funds less than a year/three years from investment will attract short-term capital gains tax.

Published on August 21, 2021

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