After a good run in 2019, Indian equities, which started 2020 on a positive note, have been on a slippery road since the Budget announcement.

With volatility here to stay, given the growth concerns in the home turf and global markets, the endeavour of money/fund managers is to contain losses during such down cycles, without compromising on long-term wealth creation.

A slew of dynamic asset allocation fund launches over the past two years, with Sundaram Balanced Advantage Fund being the latest addition to the list, substantiates this.

Dynamic allocation

Sundaram Balanced Advantage, an open-ended dynamic asset allocation fund, will be open for subscription till February 28.

Dynamic asset allocation, as a theme, endeavours to minimise the risk in equity allocation during market falls by alteringasset allocation across debt, equity and derivates.

Sundaram Balanced Advantage will invest in equities, debt instruments and derivatives.

In good times, it can invest up to 100 per cent in equities.

Similarly, during volatile times, the fund can invest up to 100 per cent of its assets in debt instruments.

The scheme uses Price/Earnings (P/E) ratio to decide the net equity allocation. For instance, if the trailing 12 months (TTM) P/E is less than 15, the net equity allocation band will be 90-100 per cent. If the TTM P/E is more than 24, the net equity allocation will be 30-45 per cent.

As a hedge against volatility, the fund can invest up to 50 per cent of its assets in derivatives.

The flexibility to park money in debt and derivatives during down cycles should help the fund contain downside during bear phases. The scheme can load up on equities once the markets recover. This way, it will be able to minimise market risk.

One cannot compare balanced advantage funds with aggressive hybrid funds as the latter allocates 65-80 per cent to equity (unhedged). Hence, the participation of balanced advantage funds in equity rallies is limited.

How has this category performed in recent times? Currently, 23 funds are under this category, dynamically allocating between equity and debt, based on equity-market conditions.

Though the category was introduced post the re-categorisation of mutual funds in mid-2018, seven funds, including ICICI Prudential Balanced Advantage and Aditya Birla Sun Life Balanced Advantage, have been following this strategy for more than six years.

Each fund follows an in-house valuation model to determine their equity allocation.

These valuation metrics use various quantitative criteria such as P/E, price-to-book (P/B) or dividend yields.


Most of these funds follow a hedging strategy by taking equity derivative positions when the equity market valuation appears high. This helps limit the downside while maintaining the equity allocation at above 65 per cent.

The allocation to equity shares (unhedged) is 30-80 per cent in most funds. The debt portion is managed with a blend of accrual strategy and duration play.

Performance, as measured by five-year rolling returns calculated from the last seven years, shows that the top five funds from the category have delivered 13.8 per cent CAGR, while the Nifty 50 TRI clocked 11.6 per cent.

The writer is an independent financial consultant