Are BAFs the answer to asset allocation worries?

Balanced Advantage Funds (BAFs) or Dynamic Asset Allocation Funds (DAAFs) have develop into the dominant hybrid mutual fund class with an AUM (belongings underneath administration) of ₹1.64 trillion. Within BAFs, a selected mannequin has additionally develop into dominant. This mannequin makes use of derivatives to cut back efficient publicity to any stage that the fund supervisor thinks match, whereas sustaining a gross fairness publicity of 65%. This permits BAFs to be taxed as fairness funds even when their precise fairness publicity is minimal at instances.

HDFC Asset Management Company, which till not too long ago adopted a extra static strategy, avoiding the usage of derivatives and retaining fairness publicity between 65-80%, has additionally embraced the extra dominant mannequin and introduced down its efficient fairness publicity to 57% as markets rose in 2021. Mirae Asset Mutual Fund, which had steered away from BAFs, arguing in favour of its aggressive hybrid fund, has additionally filed for a BAF with the Securities and Exchange Board of India (Sebi).

SBI Mutual Fund, which launched its personal BAF in August 2021, noticed its belongings swell to a document ₹20,000 crores by October.

However, accompanying the success of this class are allegations of mis-selling of BAFs. This has parallels with the mis-selling of hybrid funds on the whole within the submit demonetization period of 2017-18, once they have been bought on the promise of fastened returns.

The flexibility constructed into BAFs permits them to be marketed as funds for ‘all seasons’ and an answer to traders who wish to allocate cash between fairness and debt. Our panel of specialists explains what position BAFs ought to actually play in investor portfolios.

View Full ImageNiranjan Awasthi Head – merchandise, advertising and marketing & digital enterprise at Edelweiss Asset Management Ltd

BAFs can care for tactical asset allocation

There are broadly two sorts of asset allocation (AA) methods—tactical and strategic. A strategic AA relies on one’s objectives, threat urge for food and is completed throughout wider asset courses like gold, actual property, and many others. Tactical asset allocation, however, goals to drive profit from volatility in an asset class by timing the entry and exit. It will be useful if achieved in equities as it’s the most risky asset class.

BAFs can care for tactical asset allocation in equities since they enhance and cut back fairness allocation in a disciplined approach utilizing a pre-defined mannequin. They purpose to cut back drawdowns when markets are falling and take part within the upside moderately properly.

Doing tactical asset allocation into equities on the investor stage is just not tax-efficient and can also be emotionally draining. In that context, BAFs generally is a good answer for tactical asset allocation into equities and this one fund can care for this piece very properly. It can kind the core a part of investor’s portfolio in the long run.

View Full ImageSalonee Sanghvi Founder, My Wealth Guide

New traders can use BAFs to dip their toes into equities

Asset allocation is the only most necessary consider any portfolio. 90% of your returns are decided by your asset allocation, 5% by product choice and 5% by market timing. In BAFs, the fund supervisor decides the debt/fairness allocation primarily based on market circumstances, which can not match the investor’s monetary circumstances, so traders would wind up taking far larger or decrease threat than they should. While market timing could appear engaging, in the long run the incremental returns are solely marginally larger. Instead of a one-size-fits-all strategy, it’s higher to have flexibility to spend money on massive, mid, small and throughout durations of debt primarily based on each’s requirement.

For new traders, BAFs generally is a good method to dip the toes into investing in fairness and getting comfy with the inherent volatility. Since they might lack the self-discipline to rebalance the portfolio as per the predetermined asset allocation, these funds rebalance routinely by eradicating human biases from the equation.

View Full ImageChintan Haria Head – product & technique, ICICI Prudential Mutual Fund

BAFs may help overcome behavioural biases

The frequent behavioural sample seen amongst traders is to take a position when market rallies even at larger valuations and pause when market corrects. This tends to harm an investor in the long term and results in suboptimal returns made on the funding. In order to handle this funding flaw, ICICI Prudential Mutual Fund launched BAF greater than a decade in the past; a fund which invests in a counter-cyclical method. Our goal was to get traders invested in a product, which can ship a very good risk-adjusted expertise of investing even in risky fairness markets. The authentic genesis of the product was to purchase low and promote excessive whereas retaining apart human feelings. The product was designed in a fashion to profit from market volatility and promoted throughout investor profiles. Therefore, the strategy needs to be conservative. Equity and debt are the most important monetary asset courses. Hence, for asset allocation in monetary asset courses, BAF is most apt as a product for all traders.

View Full ImageRavi Saraogi Co-founder, Samasthiti Advisors

Relying on BAFs is akin to not having a technique

BAFs can’t be an answer to investor’s strategic asset allocation. This is as a result of the asset allocation of BAFs is dynamic, whereas the strategic asset allocation of an investor ought to comply with a predicable glide path primarily based on their monetary objectives. Relying on a BAF for asset allocation is akin to not having an asset allocation technique. BAFs can solely be used for tactical asset allocation calls the place the investor outsources taking market course calls to the fund supervisor. Apart from tactical asset allocation, the opposite case the place BAFs will be helpful is for monetary objectives which sit within the gray zone of the time continuum, i.e., for a monetary purpose which is neither imminent and therefore requires solely a debt allocation, nor a monetary purpose which is sufficiently distant and requires a full fairness portfolio. In phrases of threat, BAFs have larger draw back safety in comparison with aggressive hybrid funds resulting from their flexibility of accelerating allocation to debt investments.

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