SBI MF launches Balanced Advantage Fund with percentage withdrawal facility

Currently, most mutual fund houses allow investors to set SWP as a fixed sum, say ₹10,000 per month. However, this fixed withdrawal takes no account of the fund’s actual value and can deplete your investment over time. A percentage withdrawal, on the other hand, will automatically fall when markets trend lower.

The fund will be managed by Dinesh Balachandran and Gaurav Mehta on the equity side and Dinesh Ahuja on the debt side. The New Fund Offer period will run from 12 August to 25 August and is open-ended, you can also transact in the fund thereafter.

Like other Balanced Advantage/Dynamic Asset Allocation Funds, the SBI Balanced Advantage Fund will use a combination of equity, debt and arbitrage to move between equity and debt. The fund house will set its asset allocation based on sentiment, valuations and earnings drivers.

According to the model set by the fund house, its initial equity allocation will be around 40% with another 35% going into debt and the balance 25% being arbitrage. Arbitrage allows a fund house to reduce equity risk while keeping the minimum 65% corpus in stocks that is required for equity taxation on capital gains.

The fund can also allocate up to 20% in international stocks. This foreign diversification call will be a bottom-up view based on analyst research, said Balachandran. “In terms of segments, mid and small caps were cheap relative to large cap companies a year ago. However, we feel large caps offer better value at this point. The case for growth and value stocks is also evenly balanced compared to the strong case for value, a year ago,” he added.

According to Balachandran, there is sufficient value in sectors such as health care as well as financial companies, which are not lenders (such as insurance and asset management). On the debt side, the fund will be conservative on both credit and duration according to Ahuja since it will prioritize maintaining a high level of liquidity, to enable shifts to and from equity.

The SWP (A) percentage is calculated in relation to the scheme’s Net Asset Value (NAV). The fund house has also set up a default withdrawal percentage of 0.5% each month, 3% every half year or 6% every year although the investor can modify this as per their convenience. For instance, ₹60,000 will be redeemed if the value of your investment is ₹10 lakh. If in the next year, the fund’s value rises to ₹15 lakh, the withdrawal will rise to ₹90,000.

Similarly, if the markets crash and the investment’s value drops to ₹5 lakh, the withdrawal will be 30,000. This is in contrast to a standard SWP which withdraws say ₹60,000 per year irrespective of fund value. According to DP Singh, executive director, SBI Mutual Fund the default withdrawal rates are on par with current FD rates.

For retirees who want regular income, a fixed amount is likely to be more useful than a percentage withdrawal. However, for those willing to accept volatility in income, a percentage withdrawal can mitigate the risk of using up one’s money. Investors should be wary of pitches from relationship managers portraying the withdrawal as a fixed return since it can also involve the withdrawal of capital as well as returns when the fund does poorly.

“I think this option is conceptually very sound. However, I say this with a caveat – I would want to see how it works in practice before recommending it to my clients,” said Rushabh Desai, a Mumbai based mutual fund distributor. The fund is slated to have an expense ratio of 1.7% on its regular plan and 0.4-0.5% on its direct plan. Direct plans do not feature commissions to mutual fund distributors.