Why it’s difficult to select schemes from the balanced advantage MF category

After the Sebi-mandated recategorisation exercise, there are now primarily 10 categories of equity schemes and six categories of hybrid funds (where there is some exposure to direct equities). Now, while 15 of these categories have a well-defined allocation limit of equity and debt exposure levels, one category remains without any such mandate – balanced advantage funds.

Due to this, it becomes difficult to select funds from this category. If you want to invest in a balanced advantage fund, here is a look at how they are structured, why it is a difficult category to select a scheme from, and who this particular category will suit. But before we tell you all of this, here is why the category of a mutual fund scheme is important.

Importance of picking the right MF category
One should select an MF category based on their risk profile and goals. Other than the scheme’s consistency in generating long-term performance, while picking a specific category one needs to consider the equity and debt allocation, and its diversification across market capitalisations.

These two factors should be largely in-line with one’s risk profile and goals. A debt-heavy scheme may not suit an aggressive investor looking for growth over long-term and similarly a mid-cap heavy scheme may not suit an investor who doesn’t want volatility in returns. Choice of MF category, therefore, plays an important role in determining the investor’s portfolio return in sync with one’s goals.

What makes balanced advantage a difficult category?
The dynamic asset allocation fund or balanced advantage fund allows the fund manager to be either 100 percent in equities or 100 percent in debt or have a mix of both the asset classes. As can be seen in the table, in practice, the exposure level for say, equities ranges between 19.94 percent and 93.83 percent of the total assets.


Further, even the market cap in case of equities, and the duration and ratings of underlying securities in case of debt investments has been kept open and undefined. “There is no clearly defined limit on equity, debt or derivative holding nor is anything stated on the kind of market cap segments to invest in. This makes dynamic asset allocation and balanced advantage difficult categories,” says Vidya Bala, Head of MF Research, FundsIndia

Is comparing simpler?
Post the recategorisation exercise, the fund houses had to either merge or rename existing schemes. Choosing one from the current lot of balanced advantage schemes may, therefore, poses problems. “Funds that were earlier in the same category may have some strategy track record to go by but funds that have just positioned themselves in these categories need to be watched to understand their style,” says Bala. Different balanced advantage schemes from fund houses can have different exposure levels in equities, even across market caps and even across debt investments. Due to this, they may generate varying performance and may not be strictly comparable.

Investment horizon
Going by most of the fund houses’ documents, the investment objective of balanced advantage schemes is to capitalise on the potential upside in equity markets while attempting to limit the downside by dynamically managing the portfolio through investment in equity and equity-related instruments and active use of debt, money market instruments, and derivatives. Understandably, they are structured differently than balanced hybrid (40 to 60 percent in equities) or aggressive hybrid (40 to 60 percent in equities) and hence, they can manoeuvre between the two asset classes in extreme situations.

What to consider
The benchmark of the schemes within the balanced advantage category may throw some light about the scheme’s allocation pattern, unless the fund decides to digress from the mandate. While one scheme may have the BSE200 as its equity benchmark, another may be the Sensex. (See table).

Picking a scheme from this stable may be tricky. “Investors need to wait for the fund to build a track record to understand their style or go with funds that were already in this category even before SEBI‘s categories,” says Bala.

Should invest in these schemes?
At times, the valuation may appear too high for the fund houses while the interest rate scenario may not be in favour as well. Currently, most fund managers in such schemes are sitting on cash in double digits. “Going by the past style and strategy of balanced advantage funds, investors who cannot handle excessive volatility in equity and want to contain equity downsides better can consider this category if they have a 2-3 year time frame. For longer time frames, a regular equity fund is a better option to build wealth as longer holding helps handle volatility naturally, says Bala.

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