Weekly Musings – NFO Pick (Canara Robeco Balanced Advantage Fund)

4 Jun 2024 , 10:00 AM

WHAT EXACTLY IS A BALANCED ADVANTAGE FUND AND WHY?

Balanced advantage fands (BAFs) are also referred to as dynamic asset allocation funds. They are a type of Hybrid Mutual Funds which invest in both equity and debt without any restriction on asset allocation. The fund manager has the flexibility to adjust the asset allocation based on prevailing market conditions. However, the basis for such allocation is rule based and normally valuations are the driving factor. Let us understand why balanced advantage funds (BAFs) add value to an investor’s portfolio?

One of the biggest advantages of the BAF is that it can give solid returns in all market conditions and can leverage from the gains of equity, debt, and derivatives. The approach is one of tactical asset allocation and hence fits property into the financial planning approach for investors. Over a longer time frame, the BAFs provide investors with higher risk-adjusted returns compared to pure equity or pure debt exposure. Above all, most BAFs are over 65% invested in equity, so they are also attractive in post-tax terms.

WHAT YOU MUST KNOW ABOUT THE WORKING OF A BALANCED ADVANTAGE FUND

Here is how balanced advantage funds in general and the Canara Robeco Balanced Advantage Fund, in particular, will work.

• By default, the Balanced Advantage Funds maintain a 65% gross allocation to equity with most of the equity portion invested in a mix of unhedged equity and hedged cash-futures arbitrage. Once the gross equity allocation is met, the balance is put in debt.
• In the last few years, the equity market indices have played a major role in boosting the returns on balanced advantage funds (BAFs). The addition of debt and a BAF approach enhances the risk-adjusted returns.
• The way tactical allocation works is that the fund manager allocates more to debt when equity markets are overvalued, and more to equity when the equity markets are attractive. This ensures that investors can have the cake and eat it too.
• Being a tactical allocation fund, this is best suited to investors with an investment horizon of 5-7 years and more. The outperformance in risk-adjusted terms may not really work to the favour of investors in the short run.
• The ideal investors in a BAF can be first-time investors, investors looking to neutralize market volatility and investors looking for diversification with the benefit of tactical allocation across asset classes.
• BAFs must keep equity allocation to 65% or more to ensure they are classified as equity funds to get the tax benefits. Otherwise, they will be classified as non-equity funds with higher tax implications.

Investors should stick to the top performing BAFs of last 3-5 years.

PERFORMANCE OF BALANCED ADVANTAGE FUNDS IN INDIA

Here is a quick look at how the balanced advantage funds (BAF) or dynamic allocation funds have performed over a 1 year period and a 5 year period. One is a short term view and the other is a slightly longer term view. In both cases, we have considered the direct plans to ignore the impact of the total expense ratio (TER) on the returns of the fund. While there are 29 balanced advantage funds in India, in our ranking below, we have only covered the top-15 by 5-year returns. We have not considered 3 year plans as that is not long enough for a balanced advantage fund to perform. We also avoided returns since inception as the periods can vary substantially. We also dropped funds that did not have the required h history The ranking below is on 5-year returns and all returns pertain to Direct Plans.

Scheme Name	NAV Direct	1 Year (%) Returns	1-Year Index (%)	5-Year (%) Returns	5-Year (%) Returns	Daily AUM (₹ Crore)
HDFC Balanced Advantage Fund	514.69	41.79	14.82	19.15	11.63	86,471.32
Baroda BNP Paribas BAF	23.65	26.99	14.82	16.91	11.63	3,833.86
Edelweiss Balanced Advantage Fund	52.78	25.01	14.82	15.87	11.63	11,281.65
Tata Balanced Advantage Fund	20.87	21.96	19.19	14.48	12.72	9,261.96
Sundaram Balanced Advantage Fund	36.65	19.71	14.82	13.52	11.63	1,504.64
ICICI Prudential BAF	72.29	20.48	19.19	13.21	12.72	56,750.35
Aditya Birla Sun Life BAF	105.35	20.86	19.19	13.12	12.72	7,181.78
Nippon India BAF	179.19	24.27	19.19	13.10	12.72	8,042.99
Kotak Balanced Advantage Fund	19.65	18.52	14.82	12.81	11.63	15,830.08
Union Balanced Advantage Fund	19.87	19.27	14.82	12.81	11.63	1,594.75
Invesco India BAF	56.99	25.42	14.82	12.13	11.63	728.74
Axis Balanced Advantage Fund	20.46	25.68	14.82	12.06	11.63	2,185.39
Bandhan Balanced Advantage Fund	25.09	19.14	14.82	11.79	11.63	2,216.86
DSP Dynamic Asset Allocation Fund	27.83	19.99	19.19	11.55	12.72	3,125.59
Motilal Oswal BAF	21.77	28.88	19.19	11.26	12.72	1,233.45

Data Source: AMFI

In the table above provided the performance of balanced advantage funds (BAFs) over 1-year time frame and 5-year time frame. We have also provided the benchmark returns, which are calculated as a diversified portfolio comprising of equity and debt. Balanced advantage funds are not a class of funds, but they are a sub-category within hybrid funds and this is classified as an equity oriented hybrid funds. There are a total of 29 business cycle funds in India managing a total AUM of ₹2,60,732 Crore, and Canara Robeco Balanced Advantage Fund NFO comes at a time when all the 3 indices viz. large cap index, mid cap index and the small cap index are trading very close to their peak levels. Here is a sneak peek.

• Let us first look at the returns on balanced advantage funds (BAFs) over a 1-year period. On a 1-year returns basis, balanced advantage funds (BAFs) generated maximum returns of 61.32% and minimum returns of 10.83%, showing fairly stable performance. The average returns over a 1 year period are 24.00%, which is impressive. Dispersion in this segment on a one year basis is high; but that can be attributed to the fact that BAFs are discretionary allocation funds, where the fund manager has the leeway to tweak holdings between equity, debt, and other asset classes.
• Let us quickly turn to how these balanced advantage funds (BAFs) performed versus the benchmark indices? Benchmark returns over 1 year were 16.22% on an average, so the average returns on balanced advantage funds (BAFs) was better than the benchmark by around 778 basis points. What is more important is that 27 out of the 29 balanced advantage funds (BAFs) gave returns better than the benchmark with only 2 funds underperforming the index. However, if you look at the top-15 covered in the table, there is a 100% strike rate of beating the index.
• Let us turn to the returns on balanced advantage funds (BAFs) over last 5 years on a CAGR basis. On a 5-year returns basis, balanced advantage funds (BAFs) generated maximum returns of 19.15% and minimum returns of 8.22%, showing wide variations in performance; but that could be more due to the wide variations in the allocation strategy. The average returns over 5 years were 12.62%, which is impressive. These balanced advantage funds (BAFs) offer an eclectic mix of equity, debt and liquid assets based on tactical allocation. Returns dispersion can be quite high due to varying strategies; and most of the allocations are rule based in BAFs.
• How did balanced advantage funds (BAFs) perform versus the benchmark since inception? Benchmark returns since inception were 12.03%, so the average returns on balanced advantage funds (BAFs) over a 5 year period was better than the benchmark by around 60 bps, which is quite narrow. The difference was much sharper in 1-year returns indicating that the benefits of tactical asset allocation could be more pronounced in the short term than in the longer term. If you look at the top 15 funds by 5 year returns, then two of them have given negative spreads over benchmark.

Out of the total AUM of ₹2,60,732 Crore, spread across 29 balanced advantage funds, the top 5 balanced advantage funds by AUM assets under management (AUM) accounted for nearly 77% of the total AUM of all BAFs.

GLANCE AT THE CANARA ROBECO BALANCED ADVANTAGE FUND NFO

Here are some details of the Canara Robeco Balanced Advantage Fund NFO you must know to decide on investing in the fund.

1. The NFO of Canara Robeco Balanced Advantage Fund opens for subscription on June 12, 2024 and will close on July 26, 2024. Being an open-ended equity oriented hybrid fund, it will reopen for sale and repurchase anywhere between 3 days and 15 days of NFO closure. While the fund has no lock-in period (other than the conditional exit load disincentive), it is suggested to hold such balanced advantage funds (BAFs) for a period of 5 years and above to get full benefits of the multiple asset allocation classes in the fund portfolio.
2. On the Standard SEBI Risk-O-Meter, the Canara Robeco Balanced Advantage Fund will be ranked as a Very High Risk Fund. The high risk is due to the predominant exposure to equities that the Canara Robeco Balanced Advantage Fund will have. In addition, there is also the risk of entering into the fund when the market is at all-time high levels. The fund will be a tactical allocation mix of equity and debt based on a broad formula. Hence, the allocation discretion to the fund manager also creates risks for the investor.
3. The Canara Robeco Balanced Advantage Fund is about long term capital appreciation with safety and tactical asset allocation thrown in. The focus is on tactical allocation across debt and equity and hence the logic of the tactical allocation and the timing mattes a lot. One risk is that the tax benefits of the fund lie in keeping the allocation to equities above 65%; failing which it will be classified as a debt fund for tax purposes.
4. Investors can invest in the NFO of Canara Robeco Balanced Advantage Fund in minimum size of ₹5,000 and in multiples thereof. This also applies to switch-ins during the NFO while additional purchases can be in such multiples too. There will be an exit load of 1% if more than 12% of the fund holdings are redeemed within 365 days. There is no exit lo load on redemptions up to 12% of the allocated corpus. There is no exit load beyond 365 days. However, investors are advised to hold these balanced advantage funds (BAFs) for a minimum period of 5-7 years to get full benefits of the theme at work.
5. The Canara Robeco Balanced Advantage Fund does not give any guarantee on returns, being an equity oriented and market risk driven fund. The fund has the discretion to spread across equity, debt, derivatives, and liquid assets to enhance the risk-adjusted returns. The fund will keep equity exposure in excess of 65% at all times; so, it can qualify as an equity fund for tax purposes and enjoy concessional rates.
6. The Canara Robeco Balanced Advantage Fund NFO will offer the growth option and the IDCW (income distribution cum capital withdrawal) option. Within the IDCW option, the fund will offer dividend payout and the dividend reinvestment option. The Canara Robeco Balanced Advantage Fund will offer investment via the Regular Plan or through the Direct plan. The NAVs on redemption will be different for regular plans and direct plans based on TER. NAVs of growth funds and IDCW funds will differ by amount of dividends.
7. The fund is best suited for investors with a relatively higher risk appetite and ability to stay invested for 5-7 years in equities. Investors in Canara Robeco Balanced Advantage Fund NFO must be prepared for the additional risk of small and mid-cap stocks as well as the estimates of the fund manager on business cycles going wrong. It will be a broad-based fund and hence, the index benchmark will also be broad-based.
8. The performance of the Canara Robeco Balanced Advantage Fund will be benchmarked to the underlying CRISIL Hybrid 50+ 50 moderate index.. The TRI (total returns index) is more reflective as it includes the impact of dividends and capital movement. The benchmark will used to evaluate fund performance; although it is advisable to also consider risk-adjusted return measures like Sharpe and Treynor for a more granular picture of risk. The fund manager for the Canara Robeco Balanced Advantage Fund is Shridatta Bhandwaldar.
9. The Canara Robeco Balanced Advantage Fund will be classified as an equity fund for tax purposes; as long as its equity exposure is decisively above 65%, which is the intent. The short term capital gains (held for under 1 year) will be taxed at 15% while long term capital gains (held for over 1 year), will be taxed at a flat rate of 10% beyond a minimum threshold exemption of ₹1 Lakh per financial year. There will be no indexation benefits on long term capital gains.

The Canara Robeco Balanced Advantage Fund NFO offers an opportunity for investors to participate in a tactical allocation fund that spreads money across equity, debt and other asset allocation with the tactical allocation grounded on basic valuation ground rules.