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Balanced advantage funds: What drives their popularity?

Balanced advantage or dynamic asset allocation funds adjust equity-debt allocations as per market conditions to optimise risk-reward. This is the first in our four-part series where we analyse if these funds have worked.

Balanced advantage funds: What drives their popularity?

Bollywood movies can be broadly classified into three categories. Some have superb storylines and acting but flop at the box office. Others are disasters in every aspect, yet become massive box office successes. And finally, there are ones that stand out on both parameters. The first lot has 'substance', the second has 'appeal' and the third is a terrific combination of both.

A similar disconnect exists in mutual funds where the utility of funds and investors' interest in these schemes do not go hand in hand. Balanced advantage funds (BAFs), also known as dynamic asset allocation funds (DAAFs), have attracted a large number of investors in the past one year. With net inflows of nearly Rs 46,000 crore in the first 10 months of 2021, the category is now the biggest in the hybrid funds space and fifth across all 37 SEBI-defined mutual fund categories. Such is the zeal for investing in these funds that the BAF launched by SBI Mutual Fund a few months back mobilised around Rs 14,500 crore to become the third largest fund in the category even before starting its operations. It was also the highest collection by an NFO of an equity-oriented fund in the history of Indian mutual funds.

BAFs invest in a mix of equity and debt and dynamically manage allocation between the two, which is usually driven by a rule-based model developed by the fund house. It is claimed that dynamic management of the allocation allows BAFs to 'capture the potential upside and limit the downside in volatile equity markets'. This sounds alluring but may not be entirely correct. In this four-part article series, we examine such claims by fund houses to find out whether the category that is topping the box-office collections offers any 'advantage' to your portfolio or if the 'dynamism' is just clever marketing.

What makes them a bestseller?
Some dynamic asset allocation funds have been around for a fairly long time but the category was officially born after the SEBI categorisation rules in October 2017. The re-categorisation brought new schemes into the tribe. Its AUM has almost doubled since July 2018 (when the re-categorisation was complete).

BAFs do not have any restriction on minimum allocation to equity or debt. They follow a truly 'go-anywhere' strategy, which is theoretically a mix of flexi-cap funds on the equity side and dynamic bond funds on the debt side. So, even within the broad asset classes, they are flexible enough to have any allocation to large-, mid- or small-cap stocks or take any duration (maturity) or credit calls on fixed-income instruments.

This flexibility is being marketed as a 'Brahmastra' - the ability to defeat the downsides of equity and debt investing and make tactical calls for investors' benefit. The way these funds are positioned in product presentations by fund houses, investors are made to believe that these funds would participate in rallies and protect against market falls. The promise of the best of both worlds works like a charm. Take a look at a few extracts from the marketing material of some big funds in this category:

  • The scheme aims to provide investors with an opportunity for long-term capital appreciation. It aims to capture the potential upside and limit the downside in volatile equity markets.
  • Ab market ke utar-chadhav ka darr kaisa? A mutual fund that can keep you smiling through market ups and downs.
  • Our model measures the future of market weather and automatically directs accordingly. Our portfolio sails full steam when weather is fair and sea abandoned.

As evident from the massive inflows, the appeal is greater in current times when investors want to participate in the market momentum but also worry about an impending fall.

Also in this series:

Part 2: Balanced advantage funds: A case of 'pinky' promise or 'pompous' promise

Part 3: Balanced advantage funds: BAFs vs static 50:50 portfolio

Part 4: Balanced advantage funds: Investor takeaway