NFO Review: BNP Paribas Balanced Fund
Mar 14, 2017

Author: PersonalFN Content & Research Team

BNP Paribas Balanced Fund is an open-ended balanced fund which seeks to generate income and capital appreciation by investing in a diversified portfolio of equity and equity related instruments and fixed income instruments.

Summary

Type	An Open ended Balanced Scheme	Benchmark Index	CRISIL Composite Bond Fund Index
Min. investment:	-Lump sum - Rs 5,000 and in multiples of Re 1 thereafter - Systematic Investment Plan - Rs 500 and in multiples of Re 1 thereafter	Plans: Options:	Regular Direct Growth* Dividend Dividend payout Dividend Reinvestment *default option
Face Value	Rs 10 per unit	Expense Ratio:	Upto 2.50 %
Entry Load	NA	Exit Load:	1% if redeemed within 1 Year from the date of allotment Nil if redeemed after 1 Year from the date of allotment
Issue Opens	March 17, 2017	Issue Closes	March 31, 2017

Investment Objective*

The investment objective of the scheme is to generate optimal returns through active management of a portfolio of debt and money market instruments.

However, there can be no assurance that the investment objectives of the Scheme will be realized. The Scheme does not guarantee/indicate any returns.

*Source: Scheme Information Document

Is this fund for you?

BNP Paribas Balanced Fund (BPBF) is mandated to invest around upto 60% of its net assets into equity and equity related instruments. Further, it will also invest upto 10% of its net assets in equity arbitrage positions. In debt and money market instruments (including units of a liquid fund), the exposure will be in the range of 30%-60% of its net assets. However, when few opportunities are available, or no opportunities are available; BPBF may park a greater composition of its portfolio (40%-70%) in debt and money market instruments (including units of a liquid fund).

Balanced funds are equity-oriented hybrid funds having a mix of equity and debt instruments in their investment portfolio. They hold a tactical allocation to both equity and debt as an asset class. A combination of these asset classes offers a high level of diversification, hence, lowering the risk as compared to a pure equity fund.

They are not very aggressive in terms of allocation and concentration to a single asset class. Although balanced funds generally lag behind diversified equity funds during equity market rallies, they hold ability to limit the excessive downside risk during bearish market conditions. So, they provide stability to your portfolio especially during highly volatile market conditions, and suitable for investors with a moderate-to-high risk profile.

How will the fund allocate its assets?

Under normal circumstances, the asset allocation pattern followed by the fund will be as under:

Instruments	Indicative allocations (% of total assets)		Risk Profile High/Medium/Low
Instruments	Minimum	Maximum	Risk Profile High/Medium/Low
Equity and equity related instruments*	30	60	Medium to High
Net Equity Arbitrage Exposure*	5	10	Medium to High
Debt and Money market instruments and/or units of liquid fund$*	30	60	Low

(*Source: Scheme Information Document) Alternate asset allocation when very few opportunities are available or no opportunities are available, the asset allocation is expected to be as follows:

Instruments	Indicative allocations (% of total assets)		Risk Profile High/Medium/Low
Instruments	Minimum	Maximum	Risk Profile High/Medium/Low
Equity and equity related instruments*	30	60	Medium to High
Debt and Money market instruments and/or units of liquid fund$*	40	70	Low

(*Source: Scheme Information Document)

* Includes investments in derivatives (gross exposure shall not exceed 50% of the asset allocation stipulated above for the relevant instrument category)

$ Debt instruments may include securitised debt up to 10% of the net assets. It may be noted that the AMC has to adhere to the asset allocation pattern indicated in the Scheme Information Document under normal circumstances.

Further it is stated in the offer document that:

The Scheme will not participate in Credit Default Swaps (CDS) for Corporate Bonds
The scheme will not invest in foreign equities including ADR/GDR and foreign debt securities including foreign securitised debt.
The scheme will not indulge in short selling and securities lending and borrowing.
The Scheme may enter into repos/reverse repos as may be permitted by RBI other than repo in corporate debt securities. From time to time, the Scheme may hold cash. A part of the net assets may be invested in the Collateralised Borrowing & Lending Obligations (CBLO) or repo or in an alternative investment as may be provided by RBI. The scheme shall not invest in any unrated debt instruments and derivatives

What investment strategies will the fund follow?

Being a balanced fund, BPBF will diversify its allocation across the equity & equity related instruments (including derivatives) and debt & money market instruments and follow the below mentioned investment strategy…

For equity allocation:
The equity portion of the portfolio will aim to provide long-term capital growth through a diversified equity portfolio of fundamentally strong companies across market cap and sectors.

The scheme will follow a bottom-up approach for stock-picking and choose companies across sectors and the scheme will primarily focus on companies that have demonstrated characteristics such as market leadership, strong financials and quality management, and have the potential to create wealth for their shareholders by delivering steady performance through the ups and downs of the market.

The focus would be to build a diversified portfolio of both value and growth companies, all companies selected will be analysed taking into account the business fundamentals, the company’s financial strength, industry structure, management quality, future earnings expectations and sensitivity of earnings.

For debt allocation:
The debt portfolio is built with an aim to generate stable income reducing the overall volatility of the fund. The fund manager will actively manage the debt portion with a view to generate reasonable income over time. The fund’s actively managed based on the AMC’s view on interest rates.

The price of fixed income instruments varies with changes in interest rates. As interest rates decline, the value of fixed income securities rise and as interest rates rise, their value declines. The AMC forms views on the likely direction of interest rates and the portfolio is structured consistent with these views. Individual instruments are bought and sold based on the conformity with the interest rate view and the instrument specific factors (credit risk, exposure). By actively managing the portfolio, the Scheme attempts to achieve its objective through both interest yield and capital appreciation. As such, the Scheme may not invest solely based on the best available yields in the market at all points of time.

Fund Manager Profile

The fund will be jointly managed by Mr. Karthikraj Lakshmanan (Equity Portfolio) & Mr. Mayank Prakash (Fixed Income Portfolio).

Mr. Karthikraj Lakshmanan (Equity Portfolio): He is Sr. Fund Manager (Equity) at BNP Paribas Asset Management India Private Limited, with almost 10 years of experience in the industry. He is Commerce graduate (B.Com), Chartered Accountant (CA) and holds a PGDM (from SPJIMR, Mumbai). Plus he has cleared CFA Level 3 (US CFAI).

Mr. Mayank Prakash (Fixed Income Portfolio):He is a Fund Manager (Debt) at the fund house with around 9 years of experience, and has been associated with the AMC since August, 2015. He is a Chartered Accountant (CA) and also holds a MBA degree from Kanpur University.

The other schemes jointly managed by Mr Lakshmanan (with Abhjeet Dey) are: BNP Paribas Equity Fund and BNP Paribas Dividend Yield Fund and BNP Paribas Midcap Fund , BNP Paribas Long Term Equity Fund , BNP Paribas Monthly Income Plan (equity portion).

Fund Outlook

The fortune of BPBF will be close linked to the way the fund manager would build the portfolio amidst time when markets have scaled a new high, and valuations seem stretched. Even for the debt portfolio, interest rate cycle seems to have come a full circle going by RBI’s sixth bi-monthly monetary policy statement for 2016-17.

So, clearly portfolio construction would be a challenging task for the respective fund managers (equity and debt) at this point in time. If the fund manager pays attention to valuation across market segment and stocks therein, focusing on largecaps and value-buying at this juncture, would be prudent strategy as against going gung-ho across market capitalisation segments and stocks. Likewise for the debt portfolio, focusing on the shorter end of the yield curve since interest rate cycle seems to have come at a full-circle and there’s change in monetary policy stance; would be a prudent strategy as against taking exposure to longer maturity papers. But remains to be seen how the fund managers play the market amid a challenging time – heightened volatility.

PersonalFN's view

Currently the market valuations have sky rocketed. We are of the view that, it would be prudent to consider balanced funds in the current market conditions. But as valuations seem stretched, portfolio construction is not going to be a cakewalk for BNP Paribas Balanced Fund.

BNP Paribas Mutual Fund is in operation in India since 2004 and currently has total 13 funds in its basket portfolio. It is slowly building its portfolio base; but we wonder why the launch of balanced fund was not thought earlier and is only now that the fund house is launching and equity oriented balanced fund when valuations are in an overbought zone.

We recommend you to clearly give BNP Paribas Balanced Fund a miss – avoid investing; and instead optfor an existing balanced fund that has proven its mettle — such as HDFC Balanced Fund , which comes from a fund house that follows strong investment processes and systems.