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Why just comparing returns won’t throw up the best balanced advantage fund

In March, half the category averaged one-month losses of more than 10 per cent

September 22, 2020 / 10:14 AM IST

Bhavana Acharya

The balanced advantage fund category houses funds that invest in a mix of derivatives, stocks, and debt. These funds decide the mix based on what the market scenario can be, using their own valuation metrics. So, when markets are heating up, these funds can hike derivative holdings – i.e., hedge their equity exposure. What this does is to protect the fund should markets correct or turn volatile. Sanguine market conditions, since they offer more buying opportunities, can see a higher open (i.e., unhedged) equity.

Since March this year, stocks have been on a rollercoaster. And while balanced advantage/ dynamic asset allocation funds started out handling their open and hedged equity exposures on a similar footing, they have since turned divergent from each other. Here’s more on this trend, and how funds have performed.

Equity up in March

The average unhedged equity holding for the balanced advantage/ dynamic asset allocation category in February was 53 per cent. For a few, it was higher, of course, such as for Axis Dynamic Equity and Edelweiss Balanced Advantage, which held nearly 64 per cent in open equity.


Come March and the corrective period, nearly all the funds hiked their open equity exposure. Average open equity rose to 62.7 per cent in March. Big jumps came in funds such as ABSL Balanced Advantage, which moved from 53 per cent in open equity to 73 per cent. Kotak Balanced Advantage, DSP Dynamic Asset Allocation, and Motilal Oswal Dynamic were the others to see large increases.

This trend of higher open equity carried on into April, which saw the category average at 67 per cent in unhedged equity as 70 per cent of the funds hiked open equity exposure. Along with the buying opportunities that this correction threw up, the drying up of arbitrage opportunities – which led to falls in returns for even arbitrage funds – could have led to the bigger exposure.

The table below shows the average unhedged exposure for the balanced advantage/dynamic asset allocation category, as well as the highest and least unhedged exposures. Note the difference between the highest and lowest levels increase.

% of portfolio that is not offset by futures. Maximum levels ignores HDFC Balanced Advantage as the fund does not do any hedging


The decline balanced advantage funds clocked at this time was in part due to this higher open equity exposure. In the whole of March, half the category averaged one-month losses of more than 10 per cent. More, the worst one-month fall in this period was well over 20 per cent for many funds. While this is still below the 30 per cent-plus losses that the Nifty 50 suffered in this period, the sharp drop in the funds’ returns sent even one-year returns into the red.

Diverging from May

If funds behaved in a similar fashion up until then, divergence began creeping in from around May and June. In May, the average open equity for the category dropped to 63 per cent. By July, the average exposure was down to 54.8 per cent.

The falling average, though, masks wide differences between the funds. There are three different trends here. One, there are funds that have been increasingly hedging their portfolios. The likes of these are Axis Dynamic Equity, which saw open equity drop from 63 per cent in February to 33.1 per cent. Others include Edelweiss Balanced Advantage or IDFC Dynamic Equity.

The second trend is that of funds remaining aggressive – these funds have unhedged equity well above peers and are similar to aggressive hybrid funds. HDFC Balanced Advantage is among these – though this fund has never hedged in any case. ABSL Balanced Advantage similarly holds a high open equity of above 70 per cent, and has even increased this in August.

The third trend is funds that have been very tactical between months. Some were very aggressive in earlier months, but quickly scaled down their open equity in the past couple of months. An example is Kotak Balanced Advantage; while being very aggressive in earlier months of March and April with a 70 per cent-plus unhedged equity, it is now down to 42 per cent. Others such as L&T Balanced Advantage upped the hedging component from June through July, but has let it climb higher now to close to 70 per cent.

So how have returns panned out? Given the stock market bounce back in the past couple of months, funds that had a higher open equity have posted better returns. Of course, should markets correct from here, the funds can also see returns slip if they remain aggressive.

This apart, a couple of funds have also taken tactical duration calls on the debt side to capture the yield rally. Gains on this front also helped push returns even as these funds were more conservative on the equity side.

Apart from HDFC Balanced Advantage, which is more an aggressive hybrid fund than a dynamic asset allocation fund, funds that had relatively steep one-year losses in March and April have pulled back up. Several funds have even pushed into the double digits.


The trends in balanced advantage funds in the past few months – and even going further back than that – have a few implications.

-While the category houses balanced advantage and dynamic asset allocation funds, there’s no clear distinction between the two. Both balanced advantage and dynamic asset allocation funds take derivative and debt calls based on markets, and tend to maintain at least 65 per cent equity orientation.

-For each fund, the mix between derivatives, open equity and debt depends on its own valuation model. This makes each fund very different from the others in terms of risk levels and how aggressive or dynamic they get.

-This in turn influences the fund’s volatility and returns. So when looking at balanced funds, a simple return comparison among them will not be sufficient. It will require looking at the portfolio as well.

-The two points above together mean that knowing why you want to invest in the fund can help pick the one best suited. For shorter-term portfolios, for example, a more aggressive fund can be a risky bet; but such funds, as long as they deliver, can work well in longer term portfolios.

-These funds can and do slide into losses even on a one-year basis. Therefore, they cannot be used for timeframes of less than 1.5 to 2 years.

(The writer is  Co-founder, PrimeInvestor)
first published: Sep 22, 2020 10:05 am

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