As per SEBI’s management norms, Balanced Advantage Funds (BAF) are categorised under the ‘investment in equity/dynamically managed debt’ category. 65% of the portfolio of a BAF is exposed to equity with the balance invested in debt. The majority exposure makes it eligible for equity taxation. The equity component of a BAF is multifold. In addition to the possibility of ‘long exposure’- the purchase of stocks from the portfolio, there is also an option available for ‘short exposure’- the sale of stocks in the stock futures segment.
Say a BAF has a corpus of Rs 1000. Out of the total corpus, Rs 800 is allocated to equity, and Rs 200 is in debt. Rs 800 is in the ‘long position’. If the equity market has investment value, you would ideally want to reduce effective equity by selling a share of it in the stock futures market. Say you sold Rs 400 worth of equity. Since, throughout the transaction, the fund has 80% long exposure and 40% short exposure, its net long equity position is 40%. Net long equity position is calculated a) in case of unfavourable volatility: when the shares are down, 50% of your equity will be protected, and b) in case of favourable volatility: the effective equity exposure as compared to the debt will increase.
The Performance of Balanced Advantage Funds over the past five years
Dynamically allocated BAFs were supposed to be the market winners when it was to correct itself. Currently, YTD (Year to Date) for Nifty is down by -11.3%. In comparison, BAF is only down by -6.3%. Although the comparison might not be fair as BAFs only partially expose equity, it gives us a perspective. And BAFs have performed better in that regard.
As BAFs are fairly new to the investment market, only 3 to 5 years of data are available for comparison. The main player in the market is ICICI Prudential BAF, which started in 2006. Since 2018 when SEBI’s norms for BAFs changed, the categories have also evolved. The table below lists the performance of different BAFs in order of their YTD (Year to Date) performance.
| Name of the Fund | AUM 31 March 2022 in Rs Cr | YTD absolute (Returns till June 2022 in %) | 3-year CAGR (Returns till June 2022 in %) | 5-year CAGR (Returns till June 2022 in %) |
| ICICI Prudential BAF | 38,265 | -1.31 | 10.36 | 9.16 |
| SBI BAF | 23,537 | -3.63 | – | – |
| TATA BAF | 4,425 | -4.00 | 9.98 | – |
| Nippon India | 5,741 | -4.17 | 8.06 | 7.35 |
| Franklin India Dynamic Asset Allocation FoF | 1,128 | -4.34 | 7.29 | 7.11 |
| Kotak BAF | 13,083 | -4.96 | 8.95 | – |
| Aditya Birla Sunlife BAF | 6,618 | -5.20 | 8.97 | 7.07 |
| L&T BAF | 2,066 | -5.31 | 6.32 | 6.15 |
| DSP Dynamic Asset Allocation Fund | 4,722 | -6.60 | 6.85 | 6.07 |
| Edelweiss BAF | 7,466 | -7.21 | 11.97 | 9.63 |
| Axis BAF | 2,051 | -7.69 | 6.55 | – |
| NJ BAF | 5,247 | -8.73 | – | – |
| IDFC BAF | 2,979 | -10.07 | 7.14 | 6.98 |
| Motialal Oswal BAF | 1,021 | -10.82 | 3.59 | 4.01 |
| Average | -6.36 | 7.79 | 6.80 |
Conclusion
Rather than falling prey to greed in bull markets and fear when markets are down and fail to resurrect, a Balanced Advantage Fund is a better choice. Not only are the assets dynamically allocated, meaning you get protection from market volatility, but BAFs are also tax-effective.
For any clarifications/feedback on the topic, please contact the writer at cleyon.dsouza@clear.in
I write to make complicated financial topics, simple. Writing is my passion and I believe if you find the right words, it’s simple.
