After a prolonged rally, markets have turned volatile in recent weeks. Concerns over excess valuations, the Israel-Iran geopolitical tension, rising crude oil prices, and the possibility of the US Federal Reserve delaying rate cuts resulting in increasing bond yields have played a role in this disruption. The outcome of the general elections is another cause for market anxiety.

It may now be time for investors to play the markets carefully and focus sharply on their asset allocation pattern.

In this regard, investors with lump sums can consider balanced advantage (or dynamic asset allocation) funds to generate risk-adjusted returns and reasonably insulate their portfolios from stiff corrections.

Given that dynamic asset allocation funds consider factors such as valuations, macros and interest rate movements to juggle stocks and bonds, the entry point becomes less relevant.

The best funds from the category are also suitable for systematic transfer plans (SWPs) in the case of those seeking to generate periodic cashflows with their invested lump-sum.

ICICI Prudential Balanced Advantage (ICICI Prudential Equity – Volatility Advantage earlier) is a true-to-label fund and is among the most consistent and robust performers in the category. It has track record of more than 17 years and regularly delivers above-average returns over the long term. Investors can consider lump-sum investments in the fund for the medium to long term.

Steady delivery

ICICI Prudential Balanced Advantage has been consistent in its performance over the years.

When point-to-point returns over multiple timeframes are taken into consideration, ICICI Prudential Balanced Advantage has always delivered well over the medium term. The scheme’s five-year returns are 13.3 per cent and over three years, they are 14.2 per cent.

Taking three-year rolling returns from January 2013 to March 2024, the fund’s performance is among the best in the category. Over this 11-year period, its mean three-year rolling return is 12.6 per cent.

The fund has always been consistently delivered on a three-year rolling basis over the above-mentioned period. ICICI Prudential Balanced Advantage has given more than 10 per cent returns more than 84 per cent of the time, placing it among the top few in the dynamic asset allocation category. It has delivered more than 12 per cent over 58 per cent from January 2013 to March 2024.

If retail investors do not have a lump sum, they can also consider SIPs. A monthly SIP in the fund for ten years would have given a return (XIRR) of 12.9 per cent.

It may also suit for moderate-risk investors seeking regular income on their lump-sum investments via systematic withdrawal plans (SWPs).

Shuffling assets deftly

The fund uses equity valuations, mainly the price-to-book ratio, to gauge whether markets are trading in fair, costly, or inexpensive zones. This enables smart juggling between equity and fixed-income asset classes. ICICI Prudential Balanced Advantage also takes exposure to derivatives for hedging purposes and, at times, even for accruals from premiums.

The gross equity level is kept at 65 per cent or higher to ensure equity taxation.

Using the price-to-book metric, when the markets cracked in early 2020, the fund took net equity (including derivatives) to levels over 73 per cent. As markets rallied sharply over the subsequent 18 months, the fund reduced equity levels steadily and brought it down to around 32 per cent levels by late 2021. Again, as markets fell sharply in February-March 2023, the fund increased net equity levels past 50 per cent, which has been brought down a bit subsequently.

The fund may miss a short and sharp equity rally but does a sound job protecting downsides during corrections.

Equity exposure is predominantly large-cap stocks, making it suitable for investors with a medium risk appetite.

In the debt portion, there is very low credit risk as much of the exposure is to government securities, AAA and AA-rated corporate bonds. The average maturity is 5.59 years for the fixed-income portion of the fund as of March 2024. The yield to maturity is quite healthy at 7.97 per cent. Modified duration is at a reasonable 2.18 years.

Derivatives exposure or s hedged position made up a little over 20 per cent of the portfolio in the recent portfolio.

Overall, ICICI Prudential Balanced Advantage is a quality fund for the core portion of any investor’s portfolio and also a key diversifier. It especially suits those with a moderate risk appetite.