Bandhan Balanced Advantage Fund changes asset allocation model; should you be worried?

BBAF is a dynamic asset allocation scheme that invests in a mix of stocks and bonds depending on the relative attractiveness of the asset class.

Bandhan Mutual Fund (earlier known as IDFC Mutual Fund) has sent out a notice to the unitholders of Bandhan Balanced Advantage Fund (BBAF) – listing out the change in the way it is going to decide the equity exposure of the scheme.

What is changing?

BBAF is a dynamic asset allocation scheme that invests in a mix of stocks and bonds depending on the relative attractiveness of the asset class. The scheme manages assets worth Rs 2,402 crore as on July 30, 2023. Sachin Relekar, Sumit Agrawal and Vishal Baria manage the equity component whereas Brijesh Shah manages the debt component.

As per the addendum dated July 5, 2023, the fund house has proposed to change the way it decides the extent of money allocated to equity. At present, a quantitative model based on weighted average price-to-earnings ratio (PE ratio) of Nifty 50 index is employed. For example, if the ratio quotes below 12, then the fund managers will allocate 90-100 percent of the money to equities, if the ratio stands between 12 and 16, then 75-90 percent of the money will be invested in stocks. The model prescribes investing more in equity if the PE ratio is low and cut the exposure to equity if the ratio is high. If the PE ratio goes above 26 then only 30-40 percent of the money in equities.

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The fund house now proposes to replace this single factor quantitative model by a multi-factor quantitative model. The new quantitative model will be based on valuations and mix of fundamental as well as technical parameters. Valuation parameter is a counter-cyclical indicator based on Nifty 50 PE ratio, which signifies increasing the equity exposure when markets are cheaper and reduction when expensive. Fundamental parameters include macroeconomic factors such as market returns adjusted for inflation, credit spreads, and the movement of the Indian currency against key currencies of developed and emerging markets. Technical parameters include a volatility index to gauge market volatility.

Why the change?

Many fund houses use multi-factor models to ascertain allocation to debt and equity. Hence this is not the first time a fund house is opting for one.

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“Whilst existing model is simple to understand, it needs other consideration factors which are ideally impacting the market movements; these factors may be market volatility, risk appetite in the financial system, currency movement, and other fundamental factors; incorporation of the same will make the model more robust. Therefore, it is proposed to adopt multiple factor-based models to determine equity allocation, depending on opportunities available at various times based on the valuation, fundamental and technical parameters,” said Sirshendu Basu, Head-Product, Bandhan AMC.

What does not change?

Barring the quantitative model, the scheme features do not change. The net equity allocation though can go down up to 30 percent. But the scheme will continue to maintain the average gross equity allocation at 65 percent by taking arbitrage trades – wherein the fund manager simultaneously buys stocks in cash market and sells same quantity in futures markets, capturing the price difference. The scheme, hence, is considered as an equity fund for taxation purpose. The same set of fund managers continue to manage the scheme.

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Exit window

Since the proposal amounts to change in fundamental attribute of the scheme, going by the regulatory guidelines, the fund house has offered the unitholders in the scheme a window of one month from July 13, 2023 to August 11, 2023. In this period the unitholders who do not agree with the change can sell their units without paying exit load, if applicable. This exit window is optional and investors in congruence with the change, should continue to stay invested.