3 Best Balanced Advantage Funds or Dynamic Asset Allocation Funds to Invest in 2023

Nov 25, 2022
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What are Balanced Advantage Funds or Dynamic Asset Allocation Funds and where do they invest?

As the name suggests, Balanced Advantage Fund/Dynamic Asset Allocation Funds have the investment mandate to manage their assets dynamically between equities and debt instruments, (depending on the market conditions and opportunities and threats playing out for the respective asset class); there is no fixed range for asset allocation. In other words, the allocation could swing between equity and debt contingent on the outlook for the respective asset classes.

That said, going by experience, most Balanced Advantage Funds usually tend to maintain a minimum 65% exposure to equities to enjoy the favourable tax status (of an equity-oriented fund) -- except in circumstances when the equity market is at a lifetime high and the fund manager believes valuations look a bit stretched.

Besides, Balanced Advantage Funds/Dynamic Asset Allocation Funds may invest a small portion in Infrastructure Investment Trusts (InvITs) and Real Estate Investment Trusts (REITs). For hedging purposes and to take advantage of arbitrage opportunities, at times such funds may also invest in derivatives.

So, Balanced Advantage Funds/Dynamic Asset Allocation Funds tactically hold a well-diversified portfolio of equities and equity-related instruments and debt & money market securities.

 

Why it makes sense to invest in Balanced Advantage Funds/ Dynamic Asset Allocation now?

As you may know, the global economy is passing through a challenging phase at present. Inflation is spiralling, the central banks (across most parts of the world) have raised their policy interest rates quite dramatically this year to tame inflation, and owing to synchronised rate hikes, World Bank and the International Monetary Fund (IMF) have warned of a global recession in 2023.

The U.S. Federal Reserve (Fed) staff economists have observed that the odds of the U.S. economy witnessing a recession next year, i.e. 2023, is almost 50%. Sluggish growth in consumer spending, tightening financial conditions, and deteriorating global outlook, are the salient downside risk according to the Fed staff. Similarly, the European Commission's autumn economic forecasts that the eurozone and most member states could head into a recession in the last quarter of 2022.

And as you know, when the west sneezes, the world catches a cold. I believe India, may not remain fully immune to global macroeconomic conditions. The impact would be seen on the Indian economy, wherein it could have a bearing on consumer sentiments and business confidence. Credit growth, which touched a 9-year high in Q2FY23, and a strong capex cycle guided by multi-year expansion plans of leading corporate houses may come down the pike. Certain capital-intensive sectors and companies within those, particularly the ones with high debt, may take a hit; their corporate earnings will be impacted. Similarly, unstable geopolitical conditions and disrupted supply chains may make matters worse. Also, anticipated recession in the major economies of the world can potentially dampen the prospects of Indian exports. So, in general, the near-term corporate earnings may be toned down.

According to the RBI Governor, Mr Shaktikanta Das, India is unlikely to face a recession like in some of the advanced economies (where the central banks have raised the policy interest rate aggressively to control inflation). He remains optimistic about the prospects of the Indian economy and its capacity to deal with the current and emerging challenges. It is this optimism as well as the fact that India is one of the fastest-growing economies that has attracted investors.

But you need to recognize that the Indian equity market is at a lifetime high, and valuations appear to be at a meaningful premium relative to the global equity markets. Therefore, one needs to approach equities carefully and tactically now as external vulnerabilities are at play -- the markets could turn very volatile in time to come.

Against this backdrop, taking appropriate exposure to Balanced Advantage Funds/Dynamic Asset Allocation Funds shall help you manage the allocation between equity and debt dynamically with a competent fund manager/s and generate better risk-adjusted returns.

Certain Balanced Advantage Funds/Dynamic Asset Allocation Funds have been able to manage the downside risk better in the bear phases of the markets in the past.

Table 1: Performance of Dynamic Asset Allocation/Balanced Advantage Funds in bearish phases

Scheme Name 05-Nov-10 to 20-Dec-11 03-Mar-15 to 25-Feb-16 14-Jan-20 to 23-Mar-20
Sundaram Balanced Advantage Fund - -8.0 -12.3
Bank of India Balanced Advantage Fund - -3.0 -13.7
Shriram Balanced Advantage Fund - - -14.2
Edelweiss Balanced Advantage Fund -4.3 -8.5 -14.5
Axis Balanced Advantage Fund - - -15.4
DSP Dynamic Asset Allocation Fund - -3.6 -17.4
L&T Balanced Advantage Fund - -12.3 -18.6
Baroda BNP Paribas Balanced Advantage Fund - 0.0 -19.1
Tata Balanced Adv Fund - - -19.4
Motilal Oswal Dynamic Fund - - -20.9
Nippon India Balanced Advantage Fund -26.3 -22.2 -20.9
Union Balanced Advantage Fund - - -23.6
IDFC Balanced Advantage Fund - -5.9 -23.7
Invesco India Dynamic Equity Fund -21.4 -14.7 -24.9
Kotak Balanced Advantage Fund - - -25.6
Aditya Birla SL Balanced Advantage Fund -16.6 -10.9 -26.0
ICICI Pru Balanced Advantage Fund -9.8 -6.7 -26.7
ITI Balanced Advantage Fund - - -32.4
HDFC Balanced Advantage Fund -22.8 -18.0 -33.3
Category Average of Balanced Advantage/ Dynamic Asset Allocation Funds -16.9 -9.5 -21.2
CRISIL Hybrid 35+65 - Aggressive Index -30.9 -11.5 -25.1
NIFTY 500 - TRI -28.2 -20.1 -37.8
Returns are Point to Point and in %, calculated using the Direct Plan-Growth option
Past performance is not an indicator of future returns.
*Please note, this table only represents the best-performing schemes based solely on past returns and is NOT recommendations as such. Speak to your investment advisor for further assistance before investing.
Mutual Fund investments are subject to market risks. Read all scheme-related documents carefully.
(Source: ACE MF, PersonalFN Research)
 

Table 1 reveals, Balanced Advantage Funds/Dynamic Asset Allocation Funds as a category, have done substantially better than Crisil Hybrid 35+65-Aggressive Index and Nifty 500 TRI (Total Return Index) during bearish phases.

It's noteworthy that the downturn of 2008 served as a clarion call to investors to pay attention to their asset allocation. Many investors learned the importance of having a Balanced Advantage Fund or a Dynamic Asset Allocation Fund in their portfolio only after losing money in the high-risk sector and thematic funds launched during the exuberant bull phase of 2003-08.

This is one of the reasons why you could find only a handful of Balanced Advantage Funds/Dynamic Asset Allocation Funds during pre-subprime or financial crisis times of 2008, although they are quite a popular category now.

But that doesn't mean, Balanced Advantage Funds/Dynamic Asset Allocation Funds are suitable only for difficult times.

Table 2: Performance of Dynamic Asset Allocation/Balanced Advantage Funds in bullish phases

Scheme Name 20-Dec-11 to 03-Mar-15 25-Feb-16 to 14-Jan-20 23-Mar-20 to Till Date
HDFC Balanced Advantage Fund 22.8 16.5 39.0
Baroda BNP Paribas Balanced Advantage Fund - - 28.0
ICICI Pru Balanced Advantage Fund 24.2 14.6 27.3
Aditya Birla SL Balanced Advantage Fund 18.3 15.0 26.8
Kotak Balanced Advantage Fund - - 25.6
Union Balanced Advantage Fund - - 25.5
Tata Balanced Adv Fund - - 25.5
Edelweiss Balanced Advantage Fund 18.0 11.2 24.8
Nippon India Balanced Advantage Fund 29.1 16.2 23.7
Invesco India Dynamic Equity Fund 26.7 14.4 23.5
IDFC Balanced Advantage Fund - 10.6 22.9
ITI Balanced Advantage Fund - - 20.9
Shriram Balanced Advantage Fund - - 18.7
L&T Balanced Advantage Fund 30.2 10.1 18.6
Bank of India Balanced Advantage Fund - 5.6 18.3
Axis Balanced Advantage Fund - - 17.9
DSP Dynamic Asset Allocation Fund - 11.7 17.7
Sundaram Balanced Advantage Fund 23.2 9.3 17.0
Category Average of Balanced Advantage/ Dynamic Asset Allocation Funds 24.0 12.3 23.1
CRISIL Hybrid 35+65 - Aggressive Index 20.6 14.4 28.8
NIFTY 500 - TRI 27.0 16.6 42.6
Data as of 18th November 2022
Returns are Point to Point and in %, calculated using the Direct Plan-Growth option
Past performance is not an indicator of future returns.
*Please note, this table only represents the best-performing schemes based solely on past returns and is NOT recommendations as such. Speak to your investment advisor for further assistance before investing.
Mutual Fund investments are subject to market risks. Read all scheme-related documents carefully.
(Source: ACE MF, PersonalFN Research)
 

Table 2 reveals that several Balanced Advantage Funds/Dynamic Asset Allocation Funds with a longer track record have generated competitive returns during market upswings compared to the returns generated by broader equity markets.

3 Best Balanced Advantage Funds or Dynamic Asset Allocation Funds to Invest in 2023
(Image source: freepik.com; photo courtesy freepik team)
 

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Which are the 3 best or Balanced Advantage Funds/Dynamic Asset Allocation Funds to invest in?

The three best or top-performing Balanced Advantage Funds/Dynamic Asset Allocation Funds are Edelweiss Balanced Advantage Fund, HDFC Balanced Advantage Fund and ICICI Prudential Balanced Advantage Fund.

Table 3: Performance of 3 best Balanced Advantage Funds/ Dynamic Asset Allocation Funds across timeframes

Scheme Name Returns (Absolute%) Returns (CAGR%) Risk-Ratios
6 Months 1 Year 2 Years 3 years 5 years 7 years Std. Dev. Sharpe Sortino
Edelweiss Balanced Advantage Fund 8.5 3.0 15.3 15.9 12.4 11.8 11.67 0.26 0.43
HDFC Balanced Advantage Fund 15.0 15.2 28.0 18.1 11.6 13.8 20.68 0.20 0.30
ICICI Pru Balanced Advantage Fund 7.9 6.9 14.1 12.6 10.6 11.5 14.25 0.16 0.21
Category average 8.3 4.4 12.5 12.0 9.0 10.3 11.8 0.13 0.22
CRISIL Hybrid 35+65 - Aggressive Index 10.1 3.5 15.6 14.5 11.4 12.5 15.35 0.17 0.25
NIFTY 500 - TRI 12.9 2.9 22.8 18.2 12.5 14.3 23.16 0.19 0.27
Performance as of 18th November 2022. Returns are Point to Point and in %, calculated using the Direct Plan-Growth option
Past performance is not an indicator of future returns.
*Please note, this table only represents the best-performing schemes based solely on past returns and is NOT recommendations as such. Speak to your investment advisor for further assistance before investing.
Mutual Fund investments are subject to market risks. Read all scheme-related documents carefully.
(Source: ACE MF, PersonalFN Research)
 

These schemes have displayed an appealing performance across the time frames with consistency on all parameters and compensated investors decently on risk-adjusted returns as revealed by their lower standard deviation compared to that of the broader markets (Nifty 500-TRI) and higher Sharpe ratio and Sortino ratio.

Let's see how they have done individually...

#1: Edelweiss Balanced Advantage Fund

Launched in August 2009, Edelweiss Balanced Advantage Fund aims to generate capital appreciation with relatively lower volatility over a longer tenure of time.

The process-driven asset allocation calls have worked well for Edelweiss Balanced Advantage Fund all throughout.

As of 31st October 2022, Edelweiss Balanced Advantage Fund held a well-diversified portfolio of 120 securities of which 82 were equity holdings and the remaining were debt and money market securities, REITs and other instruments.

The fund had a total equity exposure of 71.4% as of 31st October 2022 while debt and cash and cash equivalents formed 22.5% and 5.4%, respectively, of the scheme's portfolio. The top 10 holdings accounted for 44.3% of the portfolio.

Table 4: Top-10 holdings of Edelweiss Balanced Advantage Fund

Particulars % of assets
182 Days Treasury Bill - 01-Dec-2022 8.1
ICICI Bank Ltd. 6.1
Reliance Industries Ltd. 5.6
Clearing Corporation Of India Ltd. 5.5
HDFC Bank Ltd. 5.3
Axis Bank Ltd. 3.6
Infosys Ltd. 3.1
ITC Ltd. 2.7
State Bank Of India 2.6
05.63% GOI 12-Apr-2026 1.7
Data as of 31st October 2022
(Source: ACE MF, PersonalFN Research)
 

Edelweiss Balanced Advantage Fund has a penchant for largecaps. As of 31st October 2022, its largecap exposure stood at 58.9% of the total assets, while midcaps and smallcaps accounted for 9.3% and 3.2%, respectively.

The fund is equally mindful of risks while investing in debt and opts to invest only in sovereign debt or top-rated corporate debt securities. Under prevailing market conditions, the fund has preferred to stick to short-to-medium tenure debt securities.

#2: HDFC Balanced Advantage Fund

Launched in September 2000, HDFC Balanced Advantage Fund aims to generate long-term capital appreciation/income from a dynamic mix of equity and debt investments.

The fund's astute asset allocation, ability to spot contrarian opportunities and tendency to manage risks through ample diversification within each asset class makes it a frontrunner amongst Balanced Advantage Funds/Dynamic Asset Allocation Funds. The fund has been courageous to hold higher exposure to cash and cash equivalents in the absence of adequate opportunities.

Table 5: Top-10 holdings of HDFC Balanced Advantage Fund

Particulars % of assets
State Bank Of India 5.8
Tri-Party Repo (TREPS) 5.8
Coal India Ltd. 4.9
HDFC Bank Ltd. 4.8
ICICI Bank Ltd. 4.7
07.38% GOI - 20-Jun-2027 4.5
Reverse Repo 4.1
NTPC Ltd. 3.6
ITC Ltd. 3.2
Infosys Ltd. 3.2
Data as of 31st October 2022
(Source: ACE MF, PersonalFN Research)
 

As of 31st October 2022, the total number of holdings in HDFC Balanced Advantage Fund stood at 170, of which total equity holdings were 131. Top-10 holdings accounted for 44.6% of its portfolio. Largecaps accounted for 51.7% of the portfolio while midcap and smallcap exposure was 7.7% and 8.5%, respectively. Over the last few years, the fund's bets on Public Sector Undertakings (PSUs) and select cyclical stocks have helped it generate superior risk-adjusted returns.

The fund allocated 67.9% of its assets to equity, 19.9% to debt and 2.4% to REITs while the balance was cash and cash equivalent and other assets.

Speaking about the debt portion of the portfolio, HDFC Balanced Advantage Fund has invested in G-secs and top-rated corporate debt securities across maturities.

#3: ICICI Prudential Balanced Advantage Fund

Launched in December 2006, ICICI Prudential Balanced Advantage Fund aims to provide capital appreciation and income distribution to investors.

The fund's process-driven approach and ability to take calculated risks have made it one of the leading funds in the category.

Table 6: Top-10 holdings of ICICI Prudential Balanced Advantage Fund

Particulars % of assets
Tri-Party Repo (TREPS) 6.2
Reliance Industries Ltd. 5.9
GOI FRB 22-Sep-2033 5.8
ICICI Bank Ltd. 4.8
Infosys Ltd. 4.5
GOI - 30-Oct-2034 4.0
HDFC Bank Ltd. 4.0
State Bank Of India 2.9
Bharti Airtel Ltd. 2.5
HDFC Ltd. 2.5
Data as of 31st October 2022
(Source: ACE MF, PersonalFN Research)
 

Out of a total of 141 holdings as of 31st October 2022, 70 were equity assets. Top-10 holdings accounted for 43.2% of the fund's portfolio.

Under prevailing market conditions the fund has preferred to predominantly hold largecap stocks which constitute 59.7% of the portfolio while midcaps and smallcaps account for 6.2% and 0.6%, respectively.

The fund allocated 66.6% of its assets to equity, 24.3% to debt and 2.1% to REITs. The remaining were cash, cash equivalent and other assets.

Speaking about the debt component of the portfolio, the fund has invested across maturities, spreads and diversified across issuers. Although the fund has invested even in moderately rated debt securities ('A+ and equivalent'), its average non-G-sec individual debt security exposure has been as low as 0.2%. This suggests that the fund does not chase yields to accelerate returns.

 

Who should invest in Balanced Advantage Funds/Dynamic Asset Allocation Funds?

Balanced Advantage Funds or Dynamic Asset allocation Funds are suitable if you, the investor, do not want to miss out on rewarding opportunities in equities but want to balance out risks as well with dynamic allocation to debt & money market securities as well. However, you must have a moderate-to-high risk appetite and an investment horizon of around 3 to 5 years when investing in these funds.

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Warm Regards,
Rounaq Neroy
Editor, Daily Wealth Letter



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