Balanced advantage mutual funds in favour as pure equity play turns choppy

Balanced advantage funds that dynamically manage equity allocation based on market valuations are now the largest category by assets among hybrid funds. Data from AMFI showed that assets under management (AUM) for this category surged to ₹1.56 lakh crore as of October end from ₹93,038 crore, adding more than a million new folios over the year. By contrast, aggressive hybrid funds that allocate 65-75% to equities saw their assets climb from ₹1.18 lakh crore to ₹1.46 lakh crore.

Financial planners say many first-time investors are using this as an entry to equities as these schemes are less volatile than pure equity funds; some senior citizens are using these to earn higher returns than fixed deposits as rates fall.

There is a set of investors using these schemes to rebalance equity portfolios by booking profits in equity schemes and reallocating to this category, which has also seen two large NFOs. SBI Balanced Advantage Fund in September mobilised ₹15,000 crore while NJ Mutual Fund collected ₹5,200 crore.

"This category offers clear tax efficiency as it has equity taxation, with lower equity exposure that is dynamically reset at times to cut risk. Aggressive hybrid funds retain a larger portion of equity at all times," said Deepak Chhabria, founder, Axiom Financial.

Wealth managers said aggressive hybrid funds hold 65-75% in pure equity leaving just 25-35% to debt. With returns from debt trickling down to 4-5%, financial planners believe investors are staying away from the category as debt no longer offers attractive returns and volatility from equity is high.

Typically, balanced advantage funds vary their equity allocation between 30% and 80%, increasing equity levels when valuations are low and vice versa. For example, ICICI Balanced Advantage Fund as of November 30 has a 33% allocation to equity, while at end of March, it had a 74% allocation.

With the category expanding, financial planners point out that there are broadly three different models within the category.