Express news service

The youthful bravado of Rishabh Pant, Mohammed Siraj and Washinton Sundar was well tempered and balanced by the experience and patience of Ajinkya Rahane, Cheteshwar Pujara and Ravichandran Ashwin in the historic victory of the Indian cricket team in the series. Test earlier this year. Herein lies the message that it is necessary to mix caution and aggression and to react appropriately according to the situation.

The same principle applies even when investing in mutual funds. I remember meeting a senior executive at an international asset management company (AMC) over ten years ago. Over a leisurely lunch, he expressed surprise at the relatively limited exposure of Indian mutual fund investors to hybrid mutual funds. I had thought it was only a matter of time before the transition took place as the industry was changing rapidly.

Shortly thereafter, balanced funds (now renamed hybrid equity funds) gained in popularity and fairly well rewarded investors looking for the risk profile they offered. But the point is, with no upward shareholding restriction, some AMCs were literally running it like a pure equity fund, putting investors at greater risk than they had subscribed to.

In recent years and after the creation of this new category of hybrid funds around half a decade ago, Balanced Advantage (BAF) funds, which are by nature dynamic asset allocation funds with indefinite duration, have also become popular. He seeks to use time-tested mechanisms using a hybrid investment model to capture the rises in equities even while creating a downside safety net.

The corpus of a BAF is dynamically allocated to equities and debt securities, on the basis of certain predetermined valuation and market analysis tools. Some AMCs use the price / earnings (P / E) ratio while others use the price / earnings (P / B) ratio as the basis for determining the composition of the asset allocation. Then there are some who use some kind of hybrid model, incorporating the two, further enhanced by trend analysis.

For ease of understanding, assume that a BAF starts by investing 33 percent in pure stocks and 33 percent in arbitrage to keep gross investments in stocks at or above 65 percent while investing the rest in stocks. debt. Their long-term earnings are therefore subject to a 10 percent equity tax versus a 20 percent debt tax (with indexation).

However, like any other dynamic asset allocation fund, BIFs also have the ability to dynamically shift the corpus from equity to debt and vice versa. The underlying theme, however, is to seek capital appreciation, while guarding against volatility. To put things in perspective, it should be noted that the average decline in BAF category returns was about half that of large, mid and small cap fund categories when markets fell sharply in March and April there. is one year old. Well, this is part 1 of the series. In the next fortnight’s column, we’ll take a closer look at some of the BAF products offered by AMCs, their dynamics and performance.

Ashok Kumar
Responsible for LKW-India. He can be reached at [email protected]