The fact of the matter is that there will always be short-term downsides in investment. There is no way of avoiding it but there are many ways of limiting it. And one such efficient way of limiting downsides is investing in a Balanced Advantage Fund (BAF).
What is a balanced advantage fund?
BAF belongs to the SEBI-defined hybrid mutual fund category. These funds are generally open-ended mutual fund schemes that invest in asset classes such as equity, debt, and arbitrage instruments with the aim of capital protection while offering reasonable wealth creation opportunities. The exposure between equity, debt and arbitrage is dynamically managed in such a manner that the schemes remain equity-oriented fund with gross equity (equity plus arbitrage) exposure at 60-65% and therefore, enjoy equity taxation.
The scheme’s dynamic asset allocation strategy indicated that the exposure to equity, debt and arbitrage instruments is flexible and changes as per the dynamic market conditions. So, in an equity-favourable scenario, the scheme increases gross equity exposure and reduces debt exposure. When equity seems out of favour, the scheme’s fund manager decreases equity and increases debt exposure.
When you are down, there is no way but up from here.
Contrary to investor understanding, an equity-favourable scenario is when equity markets are on the decline and valuations have turned attractive. A declining market comes with a promise of gains in the future. Typically, each BAF scheme has its own unique model which predicts market direction based on certain valuation parameters and allows the fund manager to increase or decrease equity exposure. Unlike an equity scheme, the BAF can reduce its equity holding when markets look expensive and could witness sharp declines. This helps reduce the scheme’s downside as it declines less than the overall market correction. Then when the markets are on the rise again, the BAF is well-poised to capitalize on the gains in the market as it can increase allocation when valuations turn attractive.
For instance, between July 2018 and June 2021, the S&P BSE Sensex has moved from levels of 37,000-levels to 52,000 at present. In July 2018, the net equity levels of the BAF category stood at about 43%. Then in March 2020 when markets declined to multi-year lows, net equity levels increased to 65%. Later in early 2021 when the S&P BSE Sensex went up to 50,000, the net equity levels touched about 43%. This way between July 2018 and June 2021, those who had invested were able to capture the upmove in the market in July 2018, then limit their downside when markets fell in early 2020 and then again make the most of the rising market in early 2021.
This balancing role that BAF plays in your portfolio is extremely crucial to the long-term wealth creation process. What investors often forget is that while gaining more than the market is important for wealth creation, it is equally important to decline less than the overall market to reduce potential losses in your portfolio.
A much more tax-efficient avenue
Now that we have established that asset allocation is important let us talk about the taxation bit of it. If an investor were to manage asset allocation on their own, then each time they rebalance the asset allocation in their portfolio it would trigger capital gains tax and they would be required to pay taxes on each redemption. This would in the long run eat into the portfolio returns. Moreover, as an individual investor it is difficult to gauge market conditions and identify the right time to make changes in the asset allocation.
Investing in the BAF takes care of both these concerns. When the asset allocation changes within the scheme, the individual investor does not have to bear the tax burden every time the asset allocation changes. Thus, there is no tax impact due to change in asset allocation within the scheme. Further, fund managers being financial experts, who are better placed and better informed about changing market dynamics, would be able to time the asset allocation much more efficiently than an individual investor.
Balanced Advantage Fund: The All-season player
The dynamism that we are seeing in the market today is unparalleled. Volatility in the market is here to stay with both domestic and global factors contributing to it. Managing this volatility efficiently will be key to creating wealth which is why a product like BAF needs to be an indispensable part of an investor portfolio, be it for an experienced or a new investor.
Investing in BAF will do away with the need to find the opportune time in the market because the scheme aims to find the right opportunities for the investor in any market cycle. It takes care of the asset allocation which is the biggest advantage for an investor who probably doesn’t have the time or resources to study the market and the investment opportunities. BAF is the evergreen solution to the long-term problem of volatility.
(The author is the Chief Business Officer, SBI Mutual Fund)