If the last few months are to go by, Indian Equity Markets couldn’t do anything wrong. After the sharp fall last March as an immediate impact of COVID-19, the markets have not only shown a fairly strong V-shaped recovery, they continue to scale new heights.
Rationale aside, Nifty or Sensex scaling new All-Time Highs is great for equity market investors. But for all things in life and especially equity markets, it is said that
“What Goes Up Must Come Down”
Is It The Right Time To Enter or Increase Exposure To Equity Markets?
For most of us retail investors participating in Equity Markets, we are no strangers to market volatility, and for the most part, as long-term investors, market volatility doesn’t and shouldn’t impact us as much.
However, the question that arises from equity markets being extremely overvalued is whether it is still prudent to take a very high equity exposure, or should we wait it out for the markets to fall a little bit before we take new positions? Should we instead park our funds in debt so that we can protect ourselves from any potential volatility in the equity markets?
The right answer is that for most retail investors like us, it is impossible to both time the market and have the technical know-how to balance allocation across debt & equity.
A Hybrid (Dynamic Asset Allocation) Fund To The Rescue
With respect to asset allocation, balancing risk & returns is a massive undertaking that fundamentally decides the long-term appreciation of our invested capital.
One could chase high growth by going all-in with equity exposure, but that exposes us to a lot of volatility risk, especially in the market situation currently. The other way is to take an extremely conservative approach from a risk perspective and stay over-exposed to debt. Both these end up leading to sub-optimal asset allocation if not balanced right.
This is where Balanced Advantage or Dynamic Asset Allocation Mutual Funds come to the rescue. By design, these funds are created to constantly strike a balance between managing exposure to equity & debt.
These funds especially become critical to the portfolio when equity markets are scaling new heights, and the macro-environment suggests extreme volatility in the near & short-term.
However, there are tons of such funds to choose from, so how does one choose the right hybrid fund?
Aditya Birla Sun Life Balanced Advantage Fund Checks The Right Boxes
Aditya Birla Sun Life Balanced Advantage Fund is one of the longest-standing AMC’s, and I am personally invested in some of their debt funds.
With equity markets getting too pricey in the recent past, I went looking for a hybrid fund and I decided to zero in on the ABSL Balanced Advantage Fund.
By design, the Aditya Birla Sun Life Balanced Advantage Fund focuses on long-term wealth creation but with a focus on ensuring lower volatility by dynamically balancing allocations across Equity & fixed income securities.
What Sets Aditya Birla Sun Life Balanced Advantage Fund Apart
Approach To Asset Allocation & Management
On a simplistic fundamental level, the guiding principles for asset allocation are fairly well thought out.
Equity
- Sector agnostic approach to equity portfolio
- Primary focus on large caps with opportunistic stance towards mid-caps
- Comfortable switching between high growth & value focussed equity exposure
What is great with this approach is the fact that the fund manager is more flexible and open to go after momentum/sectoral plays that have the potential for outsized returns given the market dynamics. For example, the fund currently remains overweight on IT, Metals, Pharma & Healthcare sectors which are all sectors seeing really high near & medium-term growth.
Debt/Fixed Income
- Focus on fixed income strategy with average maturity of <2 years
- High-quality focus
We all learnt in the last year or so that with debt/fixed income products – more than returns, quality is paramount. The focus on quality and relatively lower maturity are two critical filters for fixed income products given the macro environment.
Specific Approach To Equity Exposure
- The net equity allocation is strongly back-tested and is based on strong technical parameters including trailing P/E ratios as well as Dividend Yield etc.
- In layman’s terms, the fund essentially decides to increase/decrease its net equity exposure at the right times based on strong signals and therefore removes the need for timing the market especially in high volatility periods
- Another unique approach is the fund’s use of derivative hedging strategy in its equity holding to reduce risk. What this means is that the fund manager is willing to offset any losses in a specific holding by making a corresponding gain via a derivative strategy in the same asset
(Source: ABSLAMC Research and Internal Estimates) Data as on May 31, 2021
Running a fairly sophisticated net equity model like the one ABSL Balanced Advantage Fund runs is not just great in theory, the fund’s actual implementation proves the merit for such an approach. For instance, within the last 1 year,
- ABSL Balanced Advantage Fund’s model moved to the equity overweight zone (75-80%) in April, May 2020 period just following the massive crash in the equity markets. The net equity exposure has since been trimmed given the sharp rise in market
- Given the fund’s sector flexible approach, the fund picked up key stocks in Auto, Banking, Insurance etc. sectors that saw the highest valuation crash post-pandemic thereby reaping great returns when these stocks saw a swift recovery
Flexibility With Investment
While not specific to Aditya Birla Sun Life Balanced Advantage Fund, the minimum investment in the fund stands at INR 100.
However, what I do like is the full suite of options available including the standard SIP, STP, SWP, SWF. What I found unique is also a CATP (Capital Appreciation Transfer Plan) approach which allows investors to preserve their capital & transfer only capital appreciation to other asset class/scheme at regular intervals.
As a very bullish Indian equity market participant, I am all for continuing to participate in the equity markets irrespective of the price. However, these are times when it is best to allocate a part of the investment in the hands of the professionals so for me, parking a part of my investment in such a fund seems like a no-brainer.
How do you approach investing in these times? Have you considered Dynamic Asset Allocation funds similar to ABSL Balanced Advantage Fund?
