Aggressive balanced advantage fund, or conservative? Take your pick

As the global sell-off receded, the Indian stock market staged a significant recovery by June 2021. Eventually inflation caught up with the rally, and global as well as Indian stocks corrected in 2022, only to stage another rebound in 2023.

In all these gyrations, a key question to ask is whether balanced advantage funds (BAFs) were able to pivot between equity and debt, and deliver alpha to investors.

BAFs are known for their dynamic asset allocation, adjusting equity and debt based on market conditions to optimise returns and manage risk. They help you mitigate investment risk by reducing equity exposure when markets are overvalued and increasing it when valuations are attractive.

During market downturns or volatile periods, BAFs often shift more towards debt instruments, providing stability and protecting against significant losses.

Mint has reviewed the top five balanced advantage funds—from HDFC Mutual Fund, ICICI Prudential Mutual Fund, SBI Mutual Fund, Edelweiss Mutual Fund, and Axis Mutual Fund. Our review focuses on how these funds have performed over the past three years, their risk-management strategies, net equity levels, and their unique models.

HDFC BAF: No longer aggressive

With assets under management (AUM) of ₹84,676 crore, HDFC BAF is one of the largest funds in its category. The fund’s model focuses on valuations and macroeconomic factors to make asset allocation decisions.

Historically, HDFC Balanced Advantage Fund has maintained a static asset allocation model, and refrained from using derivatives, to maintain its net equity exposure below 65%. In July 2021, HDFC BAF had an equity exposure of 67%, but by October it had dropped to 59%. After the 2022 market correction, HDFC AMC raised its net equity exposure to 65% in July that year, higher than its peers.

“This equity-oriented fund aims to provide a balanced solution, with a potential for growth typically associated with equities, coupled with the stability of debt instruments," said Gopal Agrawal, senior fund manager, HDFC Mutual Fund.

HDFC AMC’s aggressive asset allocation and value-oriented approach didn’t give huge results during 2018-21. During that time, its rolling return was just 9.51% (May 2018 to May 2021). However, from May 2021 to May 2024, the fund has delivered an average rolling return of 20.23%, beating all its peers.

Currently, however, it has taken a more conservative stance than peers, dropping its net equity exposure to 53%, the lowest in its history. Some of this may stem from a change in its fund manager after Prashant Jain quit as HDFC AMC’s chief investment officer in July 2022.

ICICI Pru BAF: Reasonable risk, reasonable returns

ICICI Pru BAF stands out for its conservative and counter-cyclical approach. The fund’s model focuses on price-to-book, or P/B, valuation, aiming to reduce equity exposure when the markets are expensive and increase it when the valuations are attractive.

With an AUM of ₹56,750 crore, the fund caters to investors who prefer a hands-off approach to asset allocation. Since the fund’s asset allocation model is broadly based on valuation, it provides the most conservative option for investors looking to navigate the markets’ ups and downs.

“Many Indians are still first-time investors or are conservative investors, and they want to participate with minimum drawdowns," said Chintan Haria, principal investment strategist at ICICI Prudential Mutual Fund.

“Investors often move out of the market whenever they see a sharp correction and enter when markets have performed. Here’s where wealth-creation gets hampered. Our model has ensured people remain invested and have equity benefits in such volatile scenarios."

In terms of performance, ICICI BAF’s returns are lower than that of HDFC BAF. 

But over the past three years, the fund has shown resilience with a 3-year average rolling return of 13.96% and a compound annual growth rate (CAGR) of 13.9%. Its minimum 3-year rolling return is the highest among its peers.

All this stems from ICICI BAF’s lower net equity exposure, with net equity levels ranging from 35% to 38% from October 2021 to September 2023. Its current net equity level is 40%. 

Axis BAF: Getting aggressive now

Axis Balanced Advantage Fund is a relatively recent entrant in this category. The fund house reclassified its Dynamic Equity Fund as Balanced Advantage in October 2021. The fund now follows a five-factor framework that includes valuations, earnings, global and domestic macro factors, trends, and global events.

“We believe the bottom-up approach is as important as top-down. Our new model helps our asset allocation committee to have a 360-degree view before we decide the right equity allocation and benefit from various market cycles," said Jayesh Sundar, fund manager, Axis Mutual Fund.

Over the past three years, Axis BAF’s net equity levels have ranged from 40% to 70%. It’s three-year CAGR for the direct plan is 14.71%, similar to ICICI BAF’s 13.91%. The fund’s net equity level as of September 2023 was 67%, higher than most of its peers.

Edelweiss BAF: Steady momentum

Edelweiss BAF follows a pro-cyclical approach, with its equity allocation typically between 60% and 65%. This approach has enabled the fund to capitalise on the positive market trend, outperforming the benchmark Nifty 50 index with lower volatility in bull phases. While most BAFs following a valuation-based or mixed model, maintaining lower net equity levels due to expensive valuations, Edelweiss BAF believes the positive trend and expensive valuations are likely to persist.

“As valuation remains expensive, most BAFs which are following valuation-based models or with mixed approach, and are running lower net equity levels," said Bhavesh Jain, fund manager, Edelweiss Mutual Fund. “Going forward, we think the trend will remain strong and valuation will remain slightly expensive."

The momentum has paid off over the past three years. From May 2021 to May 2024, the fund’s average rolling return has increased to 16.27%, with a maximum of 20.88% and a minimum of 12.69%. Prior to that, from May 2018 to May 2021, Edelweiss BAF had delivered an average return of 9.39%, with a maximum of 14.81% and a minimum of 3.43%.

The fund’s AUM stands at ₹11,285 crore, and its current net equity level is at 64%.

SBI BAF: Better than FDs

SBI Mutual Fund’s balanced advantage fund, launched on 31 August 2021, follows a framework based on three main parameters: valuations, sentiments, and earnings.

Valuations help decide the equity and fixed income allocation. The sentiment component, which includes factors such as foreign and domestic inflows, IPO activity, and retail sentiment, forms an index to allow for better decision-making on equity allocation. The earnings outlook, a smaller component of the model, helps understand potential earnings movements.

In recent years, SBI BAF has remained conservative, with net equity levels dropping from 40% to 20% recently due to expensive valuations and elevated sentiments. This approach is suitable for conservative investors concerned about market volatility.

“Our BAF is essentially meant for conservative investors who are looking for a better alternative for traditional investments with a better downside protection. Regardless of the macro circumstances, our primary endeavour remains to do better than fixed deposits," said Dinesh Balachandran, head of equity, SBI Mutual Fund.

Performance metrics such as three-year rolling returns and CAGR returns are not available for SBI BAF considering it was launched in August 2021. Its net equity level increased from 29% in October 2021 and 38% in June 2022 to 42% in September 2023. The fund’s AUM is about ₹30,133 crore.

Since inception, SBI BAF has delivered returns of 15.11% on its direct plans, better than that of peers such as ICICI and Axis.