NFO review: LIC MF Balanced Advantage Fund

LIC Mutual Fund is all set to add another fund to its bouquet of actively managed funds. The fund will dynamically manage its asset allocation between equity, debt and money market instruments.

The New Fund Offer (NFO) is open for subscription since October 20, 2021, and will close on November 03, 2021. It is managed by Yogesh Patil (Equity portion) and Rahul Singh (Debt portion) and is benchmarked against the LIC MF Hybrid Composite 50:50 Index.

About the strategy
Dynamic asset allocation funds juggle their asset allocation without minimum exposure limits to a particular asset class, based on the market conditions. Also, most funds use the arbitrage component so as to leverage the benefit of equity taxation. These funds endeavor to raise the allocation to equities to make use of bull runs but reduce it when the markets are trending at high levels, and valuations are expensive. This is done to limit the downside in case the markets fall after that.

Although the proposition of Balanced Advantage Funds is pretty appealing, we at Value Research are usually wary of such funds. We believe that dynamically moving across debt and equity, and getting it right sustainably, is a very tough promise to deliver on. On the contrary, we believe that a static asset allocation suited to your investment horizon and risk tolerance, and re-balancing with discipline is a more appropriate strategy to achieve the desired outcomes in the long run.

The graph below shows the average returns delivered by the category of balanced advantage funds in any five years over the last seven years.

The AMC will use what it calls a Fundamental Driven Mathematical Model (FDMM) to determine the optimum asset allocation level. The model uses interest rates, one year forward Price Earnings (P/E) ratio and earnings yield, to arrive at the optimum asset allocation level. The model will automatically factor in any change in any of the parameters, on a real-time basis.

On the equity side, the fund will follow a Top-down and Bottoms-up approach for stock selection with the majority of the portfolio preferably made up of large-cap stocks. Companies will be selected on the basis of Business sustainability & Management quality and Corporate Governance.

On the debt side, the portfolio will comprise G sec, PSU and AAA-rated corporate bonds. The fund house will follow the SLR process - Safety of Investment, Liquidity of the Portfolio and Returns of the Portfolio.

About the fund manager
Yogesh Patil is the Head of Equities at LIC Mutual Fund and has been associated with the company for over three years now. Before this, he has worked with Canara Robeco Mutual Fund, Sahara Mutual Fund and Religare Enterprise Limited.

He is currently managing seven funds of LIC Mutual Fund most of which he has started managing since September, 2020. Of these, five are equity funds while two are hybrids.

On the debt side, Rahul Singh will be managing the fund. He currently manages four other debt funds at LIC Mutual Fund.

About the AMC
LIC Mutual Fund is an associate company of India's premier and most trusted brand - Life Insurance Corporation of India. The company was established in 1989.

As of August 2021, the AMC managed assets worth over Rs 21,200 crore across 26 open-end equity, debt and hybrid schemes. In the actively managed open-end equity funds (excluding fund-of-fund and index funds, ETFs) segment, the fund house manages an asset base of over Rs 3,100 crore spread across six funds.