UTI Balanced Advantage Fund enters a crowded market. Should you invest?

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BAF ensures an allocation of at least 65 percent to equity. This approach ensures that the capital gains booked by the investor on units of such schemes after holding them for one year and more, are taxed as long-term capital gains on equity funds and taxed at 10 percent if they exceed Rs 1 lakh. If the model suggests lower than a 65 percent allocation, then the fund manager enters spot-future arbitrage deals in such a manner that the desired level is reached. These transactions usually offer money market returns and are not impacted by market movements. Hence, many experts track the net equity exposure of the BAF to understand how these schemes are positioned.

BAF allocations

At a time when the markets are a whisker away from reaching an all-time high, the equity allocations of BAFs have been a mixed bag. While a few adopt a counter cyclical approach – where the equity allocations are cut as valuations rise, there are a few who prefer to allocate more to stocks, when the stocks are seeing an uptrend. These models are based on multiple factors, and their allocations to equity may differ significantly from one another. Equity markets touched an intermittent low when Nifty50 index hit 16,828 on March 20, 2023. The oldest BAF – ICICI Prudential Balanced Advantage Fund has reduced the net equity exposure to 40 percent in June 2023, compared to 52 percent in March 2023. Edelweiss Balanced Advantage Fund, on the other hand, has raised allocation to stocks to 71.50 percent from 55 percent over the same period.

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According to data released by the Association of Mutual Funds in India, 29 BAF put together manage assets worth Rs 2.04 lakh crore, as of June 30, 2023.

According to Value Research, in the three years ending July 21, 2023, BAF as a category has given returns of 13.36 percent. However, the variance between the performance of schemes is wide. The best performing fund – HDFC Balanced Advantage Fund has given returns of 26.44 percent while the least returns of 8.27 percent were offered by Motilal Oswal Balanced Advantage Fund. Over the three-year period, aggressive hybrid schemes have given 18.57 percent returns.

Less Volatility

BAFs are offered as a means to contain volatility. To highlight the rationale behind launching the BAF, Vetri Subramaniam, Chief Investment Officer, UTI AMC, says, “For most investors who invest through mutual funds, the challenge is in handling the volatility. They all know the reasons why they should invest in equity and wish to participate in wealth creation through equities but don’t quite know how to handle the volatility that accompanies the journey. Investors need an asset allocation framework and a rebalancing mechanism.”

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The standard deviation for the BAF category stands at 8 percent whereas for hybrid aggressive funds it is at 11.16 percent. For flexicap funds it stands at 14.26 percent. Many BAFs allocate a significant amount of money to large cap stocks to ensure liquidity and less volatility.

Viral Bhatt, Founder, Money Mantra, a Mumbai-based financial planning firm, says, “BAFs can be a good option for investors who are looking for a more balanced investment with lower volatility than a pure equity fund.” However, it is important to remember that no investment is completely safe and BAFs can still experience losses in down markets,” he adds.

Just to give an example of a drawdown, in the month ended March 23, 2020, BAF as a category, on an average, lost 20 percent, as the broad markets tanked in anticipation of a slowdown caused by lockdowns imposed to curb the spread of the Covid19 pandemic.

What should you do?

A BAF is a good investment because it adjusts to volatile markets. Now that the S&P BSE Sensex has crossed the 66,000 point-mark and NSE Nifty also within distance of the psychological 20,000-mark, a BAF can be considered at this juncture especially if you are worried about volatility.

But keep a few things in mind. All BAFs do not follow the same strategy of buy-low-sell-high. The performance of BAFs can also be varied. It’s important to choose the right BAF that is suited to how much risk you can handle and whether you are comfortable with its strategy. Also remember, a BAF is a good asset allocation vehicle. But it might not always top the return charts, especially in a continuous bull market.

“When markets are at their peak, as they are now, BAF can reduce its equity allocation to protect against a possible downturn and increase its allocation to safer fixed income assets. This flexibility can provide a level of protection during market volatility, which is especially important in the run-up to the elections when markets can be particularly unpredictable,” says Rajat Dhar, director of the Indian Investors Federation.

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And last, but not least. Although most BAFs automatically trigger an asset reallocation depending on market levels, it is not a substitute for your entire portfolio. Keep the reins of your overall asset allocation in your hands or that of your financial planners. But a portion of your portfolio can be taken care of by a good BAF that comes with a proven track record.

As far as UBAF is concerned, let it build a track record, before you give your money to it.