Cushioning the blow: Low on equities, hybrids withstand market turmoil

BAFs decline 2.7% on average compared to a 5.4% fall in Nifty 50

Hybrid fund managers' decision to cut equity exposure over the past few months paid off. 
 

Majority of the balanced advantage and multi-asset funds — hybrid offerings that offer highest flexibility to fund managers — managed to offer significant downside protection during the latest downturn.

Data from Association of Mutual Funds in India (Amfi) shows that on an average balanced advantage funds (BAFs) declined 2.7 per cent, half of the 5.4 per cent fall seen in Nifty 50,during the six-session period ending October 7.

BAFs invest in equity and debt with the allocation to the two asset class depending largely on the equity valuations.

Multi-asset funds, which also invests in commodities (gold and silver) apart from equity and debt, managed to do better in limiting the downside. They declined only 2.5 per cent on an average as the exposure to gold provided some support.

Most hybrid funds have been trimming their equity exposure for the past several months owing to elevated valuations. The equity exposure of the three largest BAFs — that of HDFC, ICICI Prudential and SBI — have been near their record low levels for some months now. ICICI Prudential BAF and SBI BAF had only around 30 per cent net equity exposure at the end of September.

While BAFs have the flexibility to invest in equity and debt in any proportion, most BAFs maintain gross equity exposure of 65 per cent to qualify for equity taxation. The net exposure is brought down using equity arbitrage.

MF executives and investment experts say that BAFs and other hybrid funds may gain an edge over pure equity funds if the volatility continues in the equity market. The inflows into BAFs have been subdued in the last two years. However, there was some pick up in inflows in August. Investors poured over Rs 3,213 crore into BAFs in August, the highest in 12 months. The inflow was supported by a new fund offering.