Just like biryanis, no two BAFs share the same recipe

In the world of food, biryani occupies a special place. Not only is it a wholesome meal, but also engages all our sensory organs in terms of its taste, smell and sight. However, no two biryanis are alike.

Every state and region in India has its own unique twist to the offering, which is loved by almost one and all. An avid food lover would consider it a travesty if you make the mistake of comparing, say a Hyderabadi biryani with a Lucknowi biryani. And what about the potato-laden Kolkata biryani, which is so different from the Kerala version? While one may have a punchy flavour, the other one may be a bit milder on your taste buds.

What’s common between the balanced advantage fund (BAF) category of mutual funds and a biryani? What’s the comparison, you’d ask? Let me explain. Just like there is ample diversity in the world of biryani, similar is the case in the world of a category of mutual funds which is becoming very popular—the balanced advantage fund category.

A few years ago, markets regulator Sebi (Securities and Exchange Board of India) had introduced the balanced advantage category at the time of categorization and rationalization of mutual fund schemes. As per the Sebi definition, this is a category where investment in equity and debt is managed dynamically. There are no prescribed upper or lower limits for either of the asset classes. This means each balanced advantage offering can be unique in the way it is managed.

A balanced advantage fund will allocate dynamically between equity and debt in a certain range, say 30:70 or 0:100. The allocation to equity is usually determined basis a price to book or price to earnings model with other considerations. Most mutual fund (MF) players run their own unique models and hence, just like biryanis, no two balanced advantage funds are alike. Hence, while investing in a balanced advantage fund, one needs to be certain about its risk appetite and tolerance level.

Some balanced advantage funds have average net equity levels of 70-80% over the past 3-year period. At best, we can relate such offerings with aggressive hybrid funds, given the higher range of equity risk they entail. On the other extreme side are products that have has very little average net equity exposure, say in the range of 9-15% over the past 3 years.

However, many of the balanced advantage fund offerings fall in the middle ground with net average equity levels around 45-50% over the past 3 years. Currently, most of these have the lowest net equity allocation due to equity valuations being high. However, while the net equity level of these offerings may be similar, the products could be different due to their unique investment approach. In short, there is plenty of variation within this category and hence, one needs to be careful with choosing the right one on the basis of one’s requirement. Besides, the BAF models have kept evolving and changing from time to time for most manufacturers.

ICICI Prudential MF, the pioneer in BAF, having launched the first BAF in the Indian MF industry more than a decade ago, believes this category is most apt for benefiting out of market volatility and should be a part of the core portfolio of every investor. In simple words, BAF is supposed to buy low (buy equity when they are cheap) and sell high (sell equity when it is expensive) while keeping human emotions of greed and fear aside. This was the original genesis of the product; being counter-cyclical and conservative in approach (fall lesser than market in downturns).

The fund alters its equity allocation between 30% and 80% based on an over a decade old in-house model, which is largely based on the price-to-book. It is one of the few funds that has withstood the test of a complete market cycle. Be it the Eurozone crisis (2011), taper tantrum (2013), NBFC crisis (2018) or the pandemic times (2020), the fund’s counter-cyclical approach has aided in delivering a positive investment experience by aiding investors to benefit from market volatility. The average net equity level of ICICI Prudential’s BAF over the past 10 years has been 53.7%. As on 31 October, this number stood at 35.3%.

Today, as I am writing this, the BAF category is expanding in a big manner with record collections in new fund offers (NFOs) and conversations on whose BAF is better than the other are happening everywhere, and why not? Everyone wants to ride on the popularity of this category. However, investors need to be careful and thoroughly discuss with their advisers before investing in a BAF category offering.

After all, just like all biryanis, all BAFs too don’t taste alike and have unique recipes. In my case, I prefer the one that is most tried and tested.

Adil Bakhshi is head of corporate communication at ICICI Prudential AMC.