Balanced advantage fund equity exposure off lows as valuations improve

The net equity exposure of balanced advantage funds (BAFs) are off their lows as the equity market correction has eased valuations.

  BAFs, which invest in both equity and debt, mostly determine the equity allocation through valuation metrics.

 

Most offerings cut their equity allocation as valuations go up and vice-versa. 

The largest scheme in the category, which manages nearly ₹1 trillion, had a net equity exposure of 56.1 per cent at the end of February 2025. The exposure had dropped below 50 per cent in August 2024.

  In the case of ICICI Prudential BAF, the net equity exposure was 47 per cent last month compared to a low of 31.4 per cent in August 2024.

  However, equity allocation remains on the conservative side with the exposure remaining below the 65 per cent threshold.

 

  Most BAFs are equity taxation products, and hence, have to maintain a minimum 65 per cent gross equity allocation.

 

Fund managers deploy equity arbitrage strategies to lower net equity allocation when the equity valuations are not as attractive.

  The allocation is also lower compared to the highs seen in the recent past. For example, the net equity exposure of ICICI Prudential BAF had surged close to 74 per cent during the market fall in early 2020.

  Edelweiss BAF, which follows a pro-cyclical asset allocation model as opposed to the more common countercyclical approach, is the only scheme among the large ones to have reduced net equity exposure in recent months.