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First-time investors should opt for balanced advantage schemes, says Kotak MF’s Harish Krishnan

Balanced advantage funds (BAFs) have been popular with investors so far this year, especially with those who came in when markets were on a high. Since BAFs switch between equities and debt, they offer comfort to investors.

September 06, 2021 / 09:50 AM IST

One measure to judge if the stock markets are over-valued or not is to check how much equity balanced advantage funds hold at any given time. Kotak Balanced Advantage Fund, which recently crossed the Rs 10,000 crore mark to become one of the largest in its category, holds about 35 percent in equities, at the moment. The rather irrelevant six-month ban on the fixed maturity plans is unlikely to be a dampener, given the incessant equity market rally.

Balanced advantage funds (BAFs) have been popular with investors so far this year, especially with those who came in when markets were on a high. Since BAFs switch between equities and debt, they offer comfort to investors. Here’s a conversation with Harish Krishnan, executive vice-president and fund manager-equity at Kotak Mahindra Mutual Fund.

Q: Your fund’s exposure to equity has dropped from 80 percent in March 2020 to 35 percent now. Does this suggest that equity markets have peaked?

A: The fund’s equity exposure has moved between 25 and 80 percent over the last three years. In January 2020, before the pandemic outbreak, 38 percent of the portfolio was in equities – this was down from 50 percent in September 2019 (when corporate tax cuts were announced, resulting in a strong rally).

However, after March 2020’s COVID-19 market crash, we quickly capitalised on the steep fall in valuations in February and March 2020. We increased our exposure to equities by the end of March 2020. As markets bounced back, investors gained. But the incessant rally in stock prices made us cut equity exposure to the current 34 percent.


We look at two key factors: valuation and sentiment. Right now, valuations are high despite improving prospects for business cycles in the coming years.

Sentiment is also good as the broader markets have recovered; this means people find confidence in more number of stocks. And liquidity is also high, which means so much money is chasing equities. But our model says, a net equity level of 34 percent is appropriate, going by the current signs.

Q: What are the key risks to equity markets at this juncture? 

A: Over the last 15 months, markets have gone up globally and in India. My experience is that in any five-year period, there are 5-10 occasions when the markets correct by about 10 percent at least, intermittently, due to many reasons, including valuation, geo-political developments, interest rate hikes etc.

This time around, the potential risks could be tapering by developed economy central banks, interest rate hikes, geo-political events, state elections or even a potential third wave.  We are constructive on equities over the medium term, given the reforms initiated, formalising of the economy, earnings trajectory and corporate India’s improving balance sheets. However, given the one-sided nature of the rally so far, we do expect volatility to be on rise.

Q: What type of stocks and sectors do you prefer to invest in?

A: We prefer to invest in companies across sizes. We follow the philosophy of growth and quality at a reasonable price.

When our model suggests that we should increase our equities to 50-80 percent, then we hold more mid and small- cap stocks. But when our model suggests that we should cut our equity exposure to about 20-40 percent, then we prefer holding large-cap stocks.

Q: If an investor wishes to deploy Rs10 lakh in equity mutual funds, how much should she park in a BAF?

A BAF must be a core holding in a portfolio. For those who are new to financial markets, the scheme’s automatic rebalancing within equities and debt asset classes helps investors navigate through intricacies of various asset classes.

Two, BAFs suit those who wish to invest a lumpsum corpus. This is because the scheme decides an appropriate equity-debt split at all times, based on where the equity markets are.

For example, even if you invest Rs 100 in equities through Kotak’s BAF, only Rs 34 gets allocated to equities, as per today’s reading.

Three, it is ideal for long-term investors who want to compound wealth with lower volatility and without being worried about intermittent changes in the prospects of the asset class.

Disclaimer: The views and investment tips by experts on are their own and not those of the website or its management. advises users to check with certified experts before taking any investment decisions.
Vatsala Kamat
first published: Sep 6, 2021 09:50 am

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