Balanced advantage funds — a mutual fund product category that invests in both equities and bonds — have pruned their allocation to stocks as the recent market run-up has made valuations rich.
These schemes are structured to shuffle between equity and debt based on the outlook for the asset classes. After touching a four-year low of Rs 7,511 on March 23, the Nifty has rallied over 50 percent.
This has caused the price to earnings (PE) ratio — a widely-watched valuation measure — of the Nifty to cross 32 times on Friday. India is the most expensive emerging market.
Within the category, Kotak Balanced Advantage Fund has pruned its equity allocation from 79 percent on March 25 to 50.95 percent on August 20.
ICICI Balanced Advantage Fund, the biggest scheme in the category with assets of 26,139 crores, has reduced its equity allocation from 73 percent in March this year to 61.5 percent by July-end.
Motilal Oswal Dynamic Fund saw its equity allocation dip to 55 percent in mid-August from 72.3 percent in March. DSP Dynamic Allocation saw it fall from 67.3 percent to 41.22 percent in July-end.
“Earnings have been cut, valuations are up and sentiment has normalized. So, we have booked some profits leading to equity allocation coming down,” says Harish Krishnan, fund manager, Kotak Mutual.
Balanced advantage funds typically alter their equity allocation between 30 percent and 80 percent, depending on levels of the PE ratio. When valuations are high, they reduce their equity allocation and when low, increase it.
The category has gained popularity among mutual fund investors, who want fund managers to handle the asset allocations between equity and debt. Distributors believe balanced advantage funds are a good fit for investors looking for low volatility in returns.
“Due to their low volatility, balanced advantage funds often form the core portfolio of many investors,” said Anup Bhaiya, chief executive officer, Money Honey Financial Services.
Some fund houses have finetuned their investment process in their funds in this category by following a mix of valuations and direction of the market.
Edelweiss Balanced Advantage Fund follows a pro-cyclical approach to decide equity allocation. The model uses price, flow, and volatility-based indicators. This resulted in its equity allocation increase from 50 percent in March to 68 percent in July-end.
(With inputs from EconomicTimes)