Balanced advantage funds are sold to investors who are worried about rising market volatility and want hassle-free asset allocation that is also tax-efficient. The category’s 5-year and 10-year of 10-11 per cent CAGR may not match pure-equity returns, but is suitable for investors with moderate return expectations.

The balanced advantage funds/dynamic asset allocation funds (BA/DAA) category, wherein asset allocation happens based on different models, was created after SEBI’s new categorisation rules. The 29-scheme strong category’s assets under management have now crossed ₹2 lakh crore mark, making it the 4th largest amongst equity and hybrid fund baskets.

UTI Mutual Fund has now thrown its hat in this ring, with the launch of ‘UTI Balanced Advantage Fund’ whose new fund offer (NFO) period closes on August 4, 2023.

How does UTI Balanced Advantage Fund aim to carve out a niche?

Basics about the fund

UTI Balanced Advantage Fund (UTI BAF) will follow a model-guided asset allocation strategy that dynamically manages allocation between equity and fixed income. It is thought that a model approach brings in discipline and overcomes emotional biases associated with market volatility.

UTI BAF will be managing assets between equity (net long: 30%-90%) and fixed income (10-35%). The net equity allocation for the fund will be driven by an in-house proprietary asset allocation model guided by fundamental and valuation-based factors. The fund will take exposure to arbitrage (long stock, short futures) to manage gross equity exposures at 65% of total portfolio. The balance portfolio will be invested in the fixed income securities.

  • Plans: Regular Plan & Direct Plan
  • Options (under both plans): Growth Option & Payout of IDCW Option
  • Exit load of 1% will be applicable for redemption/ switch-out of more than 10% units within 12 months.
About the model

The UTI BAF model assesses four factors (2 valuation based and 2 yield based). It reckons that these are proven for having correlation with the market forward returns.

The valuation-based factors (have negative correlation with market forward returns) are 1Y Forward Price to Earnings (PE) ratio (higher the P/E ratios, lower the equity allocation) and Trailing Twelve Months (TTM) Price to Book (PB) Ratio (higher the P/B ratios, lower the equity allocation).

The yield-based factors (have positive correlation with market forward returns) are TTM Dividend Yield (higher the dividend yield, higher the equity allocation) and Yield Gap (higher the yield gap relative to history, higher the equity allocation).

The weight for each factor used by model will keep changing over time.

The rebalancing between equity & fixed income asset classes will be undertaken if the difference between the current net equity allocation of the scheme and the equity allocation suggested by the model is more than +/- 7%. This is similar to the range used for UTI Multi Asset Fund (UTI MAF) where the model has already been running for over a year.

In UTI MAF, allocation is determined across three asset classes (equity, fixed income & gold), but in UTI BAF there is no gold allocation.

UTI BAF model difference with peers

UTI MF’s model uses a four-factor methodology compared to some other models in the market which may use only 1-3 factors. While using multiple factors for UTI BAF may reduce the risk posed by the use of only one factor, at the end of the day, what really matters is the accuracy of a model.

UTI MF model does not use technical factors such as momentum. In comparison, one of the core factors for Edelweiss BAF’s EEHI pro-cyclical model is market trend which looks at 1 week, 2 weeks, 1 month & 3 month Daily Moving Average of Nifty 50. The model for UTO BAF is guided only by valuation factors, much like ICICI Prudential BAF’s model based on a long term historical mean Price to Book Value (P/BV).

UTI BAF’s planned use of a tolerance band of +/-7% is different. When used correctly, it can balance between frequency of transactions and impact of trading frequently. Many BAFs have not clearly articulated their tolerance bands and usually say that re-balancing between various permissible asset classes will be made “whenever required” as per their individual model.

Investment strategy for equity and fixed income

UTI BAF fund managers (equity - Sachin Trivedi; fixed income - Anurag Mittal) will actively manage the equity and fixed income portions of the portfolio.

A blend style of investment (growth and value) will be used for construction of the equity. The equity portfolio (50-60 stocks) will have a large cap bias (80% or higher).

The focus for the fixed income portion will be building a ‘Quality’ and ‘Liquid’ portfolio. Predominant investments will be in Sovereign/AAA & equivalent rated papers across the shorter to moderate end of the yield curve.

If the target net equity allocation is below 65%, the fund will maintain arbitrage positions (long stock-short futures) to maintain the gross equity allocation above 65% of the total portfolio. UTI BAF feels use of Nifty 50 index futures to reduce/raise equity allocation will be a less preferred option under normal circumstances.

Taxation

Though the asset allocation in the scheme shall be managed dynamically, the endeavor will be to maintain at least 65% of the total portfolio of the fund in domestic equity & equity-related instruments. This will attract equity taxation benefits as per prevailing tax laws.

Our take

Our bl.portfolio Star Track MF ratings assigns 4-5 stars ratings to Edelweiss Balanced Advantage, ABSL Balanced Advantage and ICICI Pru Balanced Advantage. So, we prefer them.

If you believe UTI BAF can give you relatively moderate returns but with lower risk (standard deviation) compared to existing funds, you can consider it.

Other investors can wait and watch for performance evidence in the new fund.

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