Last Updated on October 2, 2023 at 9:00 am
SBI Balanced Advantage Fund is an open-ended dynamic asset allocation fund benchmarked to the CRISIL Hybrid 50+50 – Moderate Index TRI. In this review, we discuss what investors need to know before considering an investment in this NFO.
A balanced advantage fund is one that dynamically changes its asset allocation as per market conditions. There are no other rules, and these funds can freely change their asset allocation between equity and debt.
Therefore the taxation status of these funds can vary from “equity-like” to “non-equity like”. In fact, SBI MF ran such a fund – SBI Dynamic Asset Allocation Fund, which they then merged with SEBI Debt Hybrid Fund just a month ago!
So the fund house has now launched a balanced advantage fund hoping to maintain equity-like taxation using a combination of stocks and arbitrage opportunities.
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While all funds in this category use a mix of quantitative and qualitative factors to determine asset allocation, some funds like DSP Dynamic Asset Allocation Fund and Motilal Oswal Dynamic Equity Fund disclose the asset allocation bands and associated rules.
Funds like ICICI Balanced Advantage Fund and SBI Balanced Advantage do not disclose their asset allocation rules. The scheme document of SBI Balanced Advantage Fund, as usual, says, “The fund manager will determine asset allocation between equity and debt depending on prevailing market and economic conditions. The debt-equity mix at any point in time will be a function of various
factors such as equity valuations, interest rates, view on the asset classes and risk
management etc.”
This reminds me of a quote (paraphrased) from the movie Lawrence of Arabia. What is the similarity between fund houses and politicians: “both answer without saying anything.”
The fund presentation offers more details of the three-tiered investment strategy.
- Determine asset allocation using a mix of sentiment indicators like Breadth of the market; Retail participation; Mutual Fund flows; Primary market activities, etc. and valuation metrics like Trailing PE; Shiller PE; Earnings yield/ Shiller Earnings yield; Bond yield spread and macro inputs like:
Fiscal/Monetary positions, real rates, monetary policy framework, variables of offshore markets, etc- The decision to allocate to equity or not will be based on the first two (sentiment and valuation) and the allocation bands based on macro inputs.
- The scheme presentation has an amusing quote: “Inflows in equity-oriented schemes have broadly tracked the past 1-year returns historically”. That tells you how mutual funds are bought or sold!
- The value or growth strategy, market cap allocation, and sector preference will be “determined using a quantitative framework”.
- Bond duration will be actively managed with investments made across the yield curve, emphasising credit quality.
Like almost all active fund NFOs, this is a case of too many unknowns. One could consider investing in a style-based NFO (e.g. mid cap) or a theme-based NFO (e.g. IT or pharma) than this, where every statement made seems impressive but is quite shallow.
Balanced advantage funds are often recommended to senior citizens for “income” after retirement. Unless such investors have adequate investments in safer assets, it can be quite a risky proposition.
This is probably one of the reasons for introducing the SWP (A) “option for regular cash flow requirements”. In addition to the usual fixed amount, one can also specify a percentage of the investment cost to be withdrawn. For example, 6% a year or 0.5% a month.
This is not particularly useful as it is imprudent to withdraw systematically from a volatile fund. A liquid fund or money market fund, or even an arbitrage fund is fine. However, here, if the NAV drops (see table below), you will be eating into your investment faster.
Many investors assume balanced advantage funds will “protect” them from market crashes. This is not true. Below are the one-month returns between Feb 22nd and March 23rd 2020, when the market crashed due to the pandemic.
| Scheme | Return bet Feb 22nd to Mar 23rd 2020 | Fraction of fall compared to Nifty |
| NIFTY 50 – TRI | -36.85 | |
| ITI Balanced Advantage Fund(G)-Direct Plan | -33.21 | 90% |
| HDFC Balanced Advantage Fund(G)-Direct Plan(Adjusted) | -31.66 | 86% |
| ICICI Pru Balanced Advantage Fund(G)-Direct Plan | -26.73 | 73% |
| Invesco India Dynamic Equity Fund(G)-Direct Plan | -26.49 | 72% |
| Kotak Balanced Advantage Fund(G)-Direct Plan | -26.07 | 71% |
| IDFC Balanced Advantage Fund(G)-Direct Plan | -25.89 | 70% |
| Aditya Birla SL Balanced Advantage Fund(G)-Direct Plan | -25.48 | 69% |
| Union Balanced Advantage Fund(G)-Direct Plan | -23.45 | 64% |
| Motilal Oswal Dynamic Fund(G)-Direct Plan | -21.81 | 59% |
| Nippon India Balanced Advantage Fund(G)-Direct Plan | -21.80 | 59% |
| Baroda Dynamic Equity Fund(G)-Direct Plan | -20.51 | 56% |
| Tata Balanced Adv Fund(G)-Direct Plan | -19.42 | 53% |
| BNP Paribas Dynamic Equity Fund(G)-Direct Plan | -19.35 | 53% |
| DSP Dynamic Asset Allocation Fund(G)-Direct Plan | -19.18 | 52% |
| L&T Balanced Advantage Fund(G)-Direct Plan | -18.52 | 50% |
| UTI ULIP 10Y-Direct Plan | -17.83 | 48% |
| Axis Dynamic Equity Fund(G)-Direct Plan | -16.89 | 46% |
| Edelweiss Balanced Advantage Fund(G)-Direct Plan | -16.01 | 43% |
| BOI AXA Equity Debt Rebalancer Fund(G)-Direct Plan | -15.81 | 43% |
| Shriram Balanced Advantage Fund(G)-Direct Plan | -14.40 | 39% |
| Principal Balanced Advantage Fund(G)-Direct Plan | -12.55 | 34% |
Many funds in this category fell quite a bit, including a 73% fall for probably the loudest fund in this space, ICICI Balanced Advantage Fund. In hindsight, we can say that the market quickly recovered, but it is a lesson that these funds cannot magically protect us from sudden falls.
Even on a day to day basis, Balanced Advantage funds has issues. The NAV Volatility (as measured by the standard deviation) is shown below over the last three years of Balanced Advantage Funds vs Aggressive Hybrid Funds vs Nifty 50.
First, notice that the aggressive hybrid funds are only a bit less volatile than the NIfty. This is why one should treat them as pure equity in the portfolio. Second, notice that the balanced advantage fund volatility is everywhere (the x-axis is just the fund number). Most of them have volatility only a bit less than aggressive hybrid funds.
Therfore for long-term goals, I might as well aggressive hybrid funds. Their volatility across the category is a lot more predictable because of the stable asset allocation. If I wish to invest after retirement, balanced advantage funds do not offer any special protection.
The key problem with these funds is their USP! Their ability to change asset allocation. The wide range in volatility across the category is because each fund manager uses a different method to “time” the market or has a different outlook. It is like blind men touching the elephant.
So the fund manager risk in choosing a balanced advantage fund is significantly higher. When you want to invest in an NFO with history only based on AMC mumbo jumbo, the risk becomes even higher. Like I keep saying these days, our money deserves a lot more respect than that.
In summary, we find nothing new or worthy of consideration in the SBI Balanced Advantage fund and recommend that investors give this a miss. Why? Because “Markets Can Fluctuate. Your Peace of Mind Shouldn’t” – the tagline for this fund!
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