SBI Balanced Advantage Fund review: Will the new scheme successfully shuffle debt and equity?

What works

The best part of Balanced advantage funds is that they decide how much to invest in equities and debt, depending on the markets. SBAF will dynamically alter its equity-debt mix. It will do this by considering sentiment indicators, valuations tools and earnings drivers, including macroeconomic inputs.

As the scheme is expected to dynamically manage the allocation between stocks and bonds, it aims to contain downside by cutting the exposure to equities when the markets seem overheated. “SBAF would help investors to fulfil their asset allocation needs and would be a very suitable investment option for investors, particularly those who are risk-averse but at the same time are looking for long-term wealth creation and want to cushion their investments from volatile market situations,” says Vinay Tonse, MD & CEO, SBI Mutual Fund.

On the debt side, the fund says it prefers safety. Ahuja says that the scheme will focus on high credit quality bonds and government securities. He would, however, actively follow the duration strategy to earn a kicker in returns.

Despite its active equity-debt allocation, SBAF will give equity tax advantage by ensuring its net equity exposure remains atleast 65 percent at all time. Like all BAFs, it will do this by investing in arbitrage opportunities.

Ravi Kumar TV, founder of Gaining Ground Investment Services says, “Most investors want to invest when markets are down but it is impossible to time the market. Funds designed to increase equity exposure based on different metrics capture this well.” Some of the balanced advantage funds increased their equity allocation during first half of 2020 could deliver good returns. On the other hand these funds also reduce equity when their framework alerts on fair valuation, he adds.

Over the last three and five years, balanced advantage funds as a category gave 9.22 percent and 8.86 percent returns, respectively as per Value Research.

What doesn’t

Though these funds suit those investors who cannot decide on their asset allocation or do not have access to investment advisor, they have limited use for investors who seek high equity allocation. This is especially true for those young investors who have long term goals such as retirement. In such cases, one should ideally allocate more to diversified equity funds. The scheme may not appeal to those who have high risk appetite.

Most balanced advantage funds charge expense ratios in line with those of equity funds – 1.18-2.65 percent. Since many times a large chunk of these schemes are invested in arbitrage positions and bonds, their expense ratio looks a bit high to many experts.

Amol Joshi, Founder of Plan Rupee Investment Services advises to invest in a new fund offer only when it brings something new to the investors – be it a new asset class or a new geography. Otherwise, it makes sense to be with a scheme with a track record. “Track record is a must while investing in a balanced advantage fund since each fund house employs different asset allocation model – pro-cyclical, counter-cyclical or some internal proprietary model. Investments can be done only when the model proves its worth across market cycles in real world,” he says.

What should you do?

There are 26 balanced advantage schemes in the mutual fund industry and many have them have put this concept of dynamic management of debt and equity to good use, with good results.

SBI Mutual Fund has done reasonably well over the last decade in both debt and equity funds. SBAF could be a long-term solution for risk-averse investors looking for some allocation to equities. The systematic withdrawal plan can work for those who are looking for some regular cash flows. However, invest in the scheme only after it builds a track record.

The new fund offer closes on August 25, 2021.