In the last two years, the popularity of Balanced Advantage Funds has increased. In December last year, an investment of Rs 3,793 crore came in these funds. It was the second highest among equity-oriented and hybrid funds. The Asset Under Management (AUM) of Balanced Advantage Funds (BAF) increased by Rs 71,587 crore in the year 2021. This is the highest growth in AUM among all equity and hybrid funds.
When the stock market goes up, BAF shares are sold (profitable), thereby reducing your chances of loss. BAFs buy shares when the stock market falls. However, not all BAFs have the same strategy. They may have similarities when it comes to selling shares, but there are different ways to go about it. This affects their performance. HDFC Balanced Advantage Fund lost up to 8.3 per cent when the stock markets declined during October-December last year.
Invesco Dynamic Equity Fund and Edelweiss Balanced Advantage Fund fell around 5-5 per cent during this period. ITI Balanced Advantage Fund and DSP Dynamic Asset Allocation Fund both lost less than 3 per cent. The average decline of the three best performing funds between October 2021 and January 2022 was around 1.5 per cent. The bottom three funds fell nearly 4 per cent.
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An analysis by Moneycontrol reveals that there are mainly four types of Balanced Advantage Funds in 2021 based on equity allocation. Kotak Balanced Advantage Fund and DDF have consistently maintained 30 per cent of their money in equities. IDFC Balanced Advantage Fund and ICICI Prudential Balanced Fund have 40 per cent of their money in equities. Two schemes Edelweiss and HDFC BAF have kept 60 to 70 per cent of their money in equities.
The fourth lot consists of BAFs like Nippon India Balanced Advantage Fund and Axis Balanced Advantage Fund. There were a lot of ups and downs in these during the whole of 2021.
Basically, Balanced Advantage Funds (BAFs) adopt three types of strategies. One of these strategies is pro-cyclical. “It buys at higher levels and sells at higher levels. It buys more shares at the beginning of the bull run and sells at the peak,” said Rushabh Desai, Founder, Rupee With Rushbha Investment Services. Edelweiss is a perfect example of this. Edelweiss’s allocation also increases when the stock market rises.
The second strategy is the most popular, which is counter-cyclical. BAFs adopting this strategy sell shares when the stock market is at a peak and buy when the market starts falling. “These are less volatile than other BAFs and are meant for medium risk takers,” Desai said. ICICI Prudential BAF is a perfect example of this. The AUM of this fund is Rs 38,000 crore.
The third strategy involves high equity allocation, irrespective of the level of the stock market. HDFC BAF’s equity allocation has long been above 65 per cent. But, from September 2021, its equity allocation has come down to below 60 per cent. Despite this, it falls under the equity-oriented fund (with at least 65 per cent equity allocation) category.
Is BAF Right for Your Portfolio?
Since the purpose of BAF is to protect you from losses in a downtrend and increase your profits in a bullish trend, the BF usually falls less than the Sensex in the event of a downtrend. It performs better than debt funds, as BAFs are hybrid funds. They invest in both shares and bonds. Hence you can include BAF in your portfolio.
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