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‘BAFs have the potential to become core allocation in investors’ portfolios’


Fear is temporary, but regret lasts forever. This maxim is true for investing as it is for life. Investing fear is rooted in short-term losses and investing regrets are rooted in decisions about having missed out long-term opportunities.

It is understandable, if not profitable, when investors want to cut short their investment in the falling equities market. But in a country like India, which is standing on the cusp of a long growth trajectory, not having an investment stake in her equities market will be a matter of regret in the long run. So it is necessary that investor participation be preserved to ensure that this long-term wealth potential is not squandered away. In other words, a product that manages short term volatility and provides long term growth participation may come in handy for such an investor.

The aim of effective investing is to thus balance short-term fear and long-term regret. Market pundits often suggest “Buy low and Sell high” to manage this catch-22 situation. At the heart of that suggestion is that we want our investors to maximise the potential of the market and escape its wrath. But the problem is how to do it consistently, profitably and efficiently.



Balanced Advantage fund (BAFs) is an answer to that problem. The core idea behind BAF category is to invest the highest possible equities when the market is at irrational bottom valuation; and to minimise equities when the market is at crazy tops. An investor looking for ‘near similar equity performance’, but wants lesser downside risk in the short term, can find BAF funds to be apt fit.

Funds in this category employ market models of some kind or other to help with their asset allocation. These models usually are quant based. Most often these models are designed to provide fund managers with periodic signals about market valuations, potential opportunities and potential risks. Using such models, fund managers in this category actively change their equity allocation as required. This enables them to ensure that the risks justify the future growth potential for the given market level. Since the equity allocation keeps changing based on changing market levels and conditions, this category is also called the Dynamic asset allocation category.

To give you an example of how the funds in this category behave, let’s pick the 2020 covid lockdown period. In March 2020, Nifty 50 TRI fell to almost 38% from its January 2020 peak. In comparison, a fund in this category would have typically reduced their equity allocation in this period to help protect the downside. And many BAFs actually did do that. As a result, many BAFs fell by around 22-29% in the given period of high Nifty 50 meltdown.

But what’s more interesting is that when the Nifty 50 turned from the bottom, BAFs would increase their equity allocation. Thus, the funds in this category would rally back reasonably well from the bottom. This way the investor would experience lesser downside fall and lesser anxiety while still gaining from upward market momentum.

Due to its feature of dynamic asset allocation, well managed funds in this category have the potential to improve investor participation in the equities market and improve their overall investing satisfaction. We believe that BAFs have the potential to become core allocation in investors’ portfolios. Using this fund’s risk-return advantage, investors can deploy STPs and SWPs for further wealth creation and distribution, as the case may be.

In closing, there is no one product category that delivers for all requirements. The tradeoff is between short-term fears and long-term regret. The investor will have to make a clear choice based on the time horizon he/she has, the risk appetite and the desire for higher performance. Having said that, there does emerge a rule of thumb from this. The rule is ‘lower the time horizon: lower the equity allocation’ and ‘higher the time horizon, the higher the equity allocation’.

(The author is Fund Manager and head of research, Mirae Asset Investment Managers- India.)



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