2018, as per wealth managers, might be a volatile year due to rising crude oil prices, state elections and the political uncertainty due to general elections to be held next year. Hence, they suggest investments be made in balanced advantage or dynamic funds, where fund managers can build up or cut down equity allocation to the portfolio by using formulas that have been decided earlier. These funds allocate little to equities when market valuations seem costly, and rise allocation to equities when market valuations appear cheap. In such funds, the equity component varies from 30% to 80%, while some funds(mutual Funds)could even take it up to 100% at cheap valuations. In a situation where a fund lessens its equity exposure, it makes sure that equity plus arbitrage component of the scheme is at least 65% of the corpus, that helps it qualify for equity taxation. “Balanced advantage or dynamic equity funds adjust their equity components based on market valuations, and are a good fit for investors looking to tackle volatility,” says Amol Joshi, founder, Plan Rupee Investments.
Let us view five such schemes run by domestic mutual funds.
1. Edelweiss Balanced Advantage Fund
An open-ended Balanced Scheme with an investment Planning objective to generate long-term capital appreciation and current income from a portfolio which is invested not only in equity and equity-related securities but also in fixed income securities. But no assurance can be given that the investment objective of the scheme will be realized or that income will be generated. It does not assure or guarantee any returns.
AUM: Rs 742 Crore
Fund Managers: Bharath Lahoti, Bhavesh Jain and Gautam Kaul
Top 3 equity holding: HDFC Bank, Kotak Bank and Reliance Industries
One year return: 7.98%
Looking at market trends by using technical parameters and volatility the fund(debt funds) adjusts its equity allocation and overlays that with market fundamentals. Net Equity Allocation is maintained between 30% to 80% with rebalancing done every day. Higher allocation is provided to markets performing well and lesser allocation to poorly performing markets.
2. Motilal Oswal Dynamic Fund
AUM: Rs 1,745 Crore
Fund Manager: Gautam Sinha Roy
Top 3 equity holding: HDFC, Bajaj Finance and Maruti
One year return: 8.12%
An amalgamation of income, price and dividend yield of Nifty 50 Index, the fund determines equity allocation. Net equity exposure can vary between 30% to 100% depending on market levels.
3. ICICI Prudential Balanced Advantage Fund
AUM: Rs 27,123 Crore
Fund Managers: Ihab Dalwai, Manish Banthia, Rajat Chandak and Sankaran Naren
Top 3 equity holding: HDFC Bank, Infosys and HDFC Ltd
One year return: 7.91%
This category is the hugest fund by assets under management; this fund adjusts its equity allocation with regard to price-to-book value ratio of the market, with rebalancing done every day. The equity portion is predominantly invested in large-cap funds while in the debt part the fund receives duration calls earlier, thus assisting most of the rate declines.
4. Aditya Birla SL Balanced Advantage Fund
AUM: Rs 3421 Crore
Fund Managers: Mohit Sharma and Vineet Maloo
Top 3 equity holding: ITC, HDFC Bank and ICICI Bank
One year return: 2.32%
This is a rather conservative fund that decides equity allocation using parameters like trailing PE ratio of S&P BSE 100 and other ratios such as P/B and dividend yield. The net positions have been between 32% and 37% in the last one year.
5. IDFC Dynamic Equity Fund
Assets under management: Rs 865 crore
Fund managers: Arpit Kapoor, Arvind Subramanian and Sumit Agrawal
Top 3 equity holding: HDFC Bank, Maruti, Ambuja Cement
One year return: 9.4%
This fund makes use of a quantitative model to decide allocation to equity funds and debt. Equity exposure is decided on opportunities that are there at distinct intervals of time with regard to month end weighted average PE ratio, with a large cap bias. Debt fund portion is conservatively managed with allocation to state government bonds and related companies.