Net inflows into balanced advantage funds rise: What explains the investor interest

Balanced advantage funds (BAFs) cut equity investments and increase debt holdings when equity markets run-up. They reverse the action when markets decline. Now, BAFs have been receiving strong investor flows over the last three months.

Market volatility driving auto allocation

The category got net inflows of Rs 6,416 crore between February, 2021 and April, 2021, shows data from the Association of Mutual Funds in India (AMFI). In the preceding three months (November, 2020-January, 2021), these funds faced net outflows of Rs 621 crore.

MF distributors say investors are looking at BAFs to cushion the impact of a potential market correction, while also keeping a part of their investments in equity.

“MF investors don’t want to miss out on a further equity market run-up. At the same time, they want to protect their investments from a potential market correction, triggered by the second wave of COVID-19,” says Srikanth Matrubai, chief executive officer at SriKavi Wealth.

Also read: Why do-it-yourself investors must avoid balanced advantage funds

The Nifty and Sensex have so far not been able to deliver the strong performances they gave last year.

From their lows in March last year, the two indices had ended CY20 with gains of 83 percent each, on hopes of an economic recovery. In CY21, so far, the Sensex has just gained about 2 percent, while Nifty is up 5 percent.

“Investors are opting for auto asset allocation funds such as BAFs, as there is uncertainty on which way markets will move in the coming months,” says Ajit Menon, chief executive officer of PGIM India MF.

What is a Balanced Advantage fund?

A balanced advantage fund invests in equity and debt instruments. But it seeks to alter its asset allocation depending on the fund manager’s analysis of where markets are at the moment, and where they are headed. Most BAFs come with an equity tax advantage. So, even if they reduce allocation to equities, they bump up their exposure derivative instruments, to retain the tax benefit.

Profit-taking to pocket gains

Industry experts say apart from fresh flows coming into BAFs, withdrawals have been on the lower side.

In the last three months (February, 2021-April, 2021), investor withdrawals in BAFs fell by 50 percent, shows AMFI data.

“Investors understand that profit-taking is done by such funds when equity markets run-up. Schemes reduce equity allocation by selling equity investments and the portfolio gets re-allocated in favour of debt holdings,” says G Pradeepkumar, chief executive officer of Union MF.

Should you invest in a BAF?

Moneycontrol recommends that you ideally decide your own asset allocation. That’s because all BAFs aren’t the same. How a BAF changes its asset allocation and whether or not the strategy works out, depends to a great extent on the fund manager’s reading of the market. Besides, how much equity and debt a fund can hold, also depends on each BAF.

Invest in a BAF for the satellite portion of your portfolio only if you have an adviser to guide you about a scheme’s strategy and long-term pedigree.

Disclaimer: The views and investment tips by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decision.