Avoid exiting Balanced Advantage Funds based on short-term underperformance

Balanced Advantage Funds have had a weak year, but advisors warn against knee-jerk exits, saying investors should stay invested unless a fund persistently lags peers and benchmarks

Balanced Advantage Funds (BAFs), also called dynamic asset allocation funds, have underperformed over the past year. This category, with 41 funds and assets under management worth ~Rs 3.18 trillion, has delivered a meagre 4.3 per cent average return. Investors should not react hastily since the current weak phase may prove temporary.

 

Why have BAF models struggled this year?

 

Many BAFs struggled to adjust net equity levels amid sharp swings in valuation. “Several funds either maintained very low equity exposure during strong market phases or kept net equity too high when markets corrected. Hence, with a few exceptions, most BAFs could not benefit from the volatility the category is designed to navigate,” says Manuj Jain, co-founder, ValueMetrics Technologies.

 

Quant-driven models often falter during unpredictable macro events. “Geopolitical shocks and other black swan events lack historical precedent, so algorithm-based signals fail to respond effectively during such regime shifts,” says Archit Doshi, senior vice-president, Prabhudas Lilladher (PL) Asset Management Company.

 

Most BAFs invest the bulk of their assets in equities. “Returns were underwhelming because the broad Nifty 500 gained a paltry 4 per cent over the past 12 months,” says Karan Aggarwal, co-founder and chief investment officer, Elever.

 

Arnav Pandya, founder, Moneyeduschool, adds that weakness in mid- and small-cap segments and rising yields, which affected debt-side performance, amplified the impact. Jain points out that the absence of commodity exposure also eroded returns.

 

Will volatility continue?

 

Equity market volatility may persist due to domestic and global factors. “The price-to-equity (P/E) ratio on a consolidated basis for the broad equity universe is at a historically risky range of 24-25x. The returns for the meaty equity slice will be driven largely by earnings per share growth, which can be 8-10 per cent in an optimistic scenario. Historically, these valuation levels make Indian equities susceptible to low single-digit returns,” says Aggarwal.

 

Is there scope for better performance ahead?

 

Jain is of the view that performance could improve, provided markets continue to see pockets of volatility and dispersion. Doshi adds that dynamic strategies outperform in volatile, trendless markets but lag in strong directional rallies.

 

“As earnings recover, these funds should benefit from improved equity performance,” says Vishal Dhawan, founder and chief executive officer, Plan Ahead Wealth Advisors.

 

A turnaround will also hinge on the performance of individual funds. “If asset allocation models respond effectively to market conditions, the category has the potential to deliver improved outcomes,” says Jain.

 

Should investors exit due to recent underperformance?

 

Pandya cautions investors against exiting due to temporary underperformance. Jain says investors who want equity participation, lower volatility and a smooth investment experience should stay invested. Investors must have a minimum three- to five-year horizon.

 

Existing investors should not stop their systematic investment plans (SIPs). “Doing so would defeat the purpose of accumulating units at different valuation points,” says Doshi. Aggarwal suggests lump-sum investments only during a sharp market correction.

 

Exits, according to Doshi, are warranted only if a fund consistently underperforms its peers and its benchmark.

 

Should new investors consider BAFs?

 

First-time equity participants and investors with a conservative or moderate profile may go for these funds. “These funds suit investors who are not confident about when—at what valuations—and how much to switch between asset classes, and those who wish to gain from their tax-efficient rebalancing,” says Dhawan. 

 

When selecting a BAF, assess it against a relevant hybrid index rather than the Nifty 50. Doshi suggests avoiding BAFs with high fees or a high turnover ratio. He advises choosing a fund whose mandate allows a wider band for equity allocation. According to him, a five-year track record is essential to gauge performance across bull and bear phases.

 

Dhawan warns against shifting to multi-asset allocation funds based solely on recent outperformance, since the yellow metal’s performance, the key driver, may not be repeated anytime soon.