Balanced advantage funds' equity exposure up as valuations shrink

Funds take risk but stay cautious; most schemes had equity share in range of 50-60% in Jan

The equity exposure of balanced advantage funds (BAFs), which dynamically invest in equity and debt based on market conditions, has inched up over the past year and a half as the price and time correction in equities eased valuations to some extent.

 

HDFC BAF, which is the largest in the category, had 68 per cent of its portfolio allocated to equity in January 2026, up from 50 per cent in September 2024, shows data from its factsheets. Most other schemes have also raised their allocation in the same period.

 

Fund managers attribute the rise to easing of valuations. 

"We have been mindful of elevated equity valuations and a moderation in earnings growth, which has been reflected in our balanced asset allocation stance through 2025. Over the past few quarters, a combination of price correction and time consolidation has brought valuations to more reasonable levels," said Dinesh Balachandran, head of investments, SBI Mutual Fund.

 

However, despite the rise, equity exposure remains on the balanced or conservative side for most schemes. The five largest schemes, except for HDFC BAF, had net equity exposure of less than 60 per cent at the end of January 2026.

 

ICICI Prudential BAF, the second-largest scheme, had a net equity exposure of 53 per cent in January, up from 32 per cent in September 2024. SBI BAF had 48 per cent allocated to equities and Kotak BAF had a net exposure of 58 per cent.

 

While BAFs follow varied models to determine optimal asset allocation, equity exposure of most schemes is largely linked to market valuations. Allocations typically reduce when valuations rise and increase when valuations moderate. Net exposure also reflects individual scheme positioning — while some fund managers adopt a conservative stance, others are relatively more aggressive in their allocation strategy.

 

A few schemes, like the Edelweiss BAF, take a starkly different approach. The scheme follows a pro-cyclical model — increasing equity exposure in rising markets and reducing it when markets weaken. In January, it had net equity exposure of 47 per cent, down from 67 per cent in September 2024.

 

Equity valuations currently remain above the long-term averages. The 12-month trailing price-to-earnings (PE) ratio of Nifty 50 is 23.5x (as of February 17), in line with the five-year average of 23.8x. The comparative valuations are higher in the case of smallcap and midcap indices. The Nifty Midcap 100 and Nifty Smallcap 100 indices are currently trading at a PE of 34.5x and 29.6x compared to their five-year average of 35.6x and 27.5x, respectively, shows data from Bloomberg.

 

"Despite recent corrections from the peak, overall market valuations continue to remain in the neutral zone. While the narrative around India's long-term structural growth continues to remain positive, there may be minor hiccups in the interim due to geopolitical & trade tensions, choppy foreign institutional investor (FII) flows, soaring global valuations, and volatile macros," ICICI Prudential MF said in its latest equity outlook.