SBI Balanced Advantage Fund: A good hybrid fund in these market conditions

SBI Mutual Fund launched SBI Balanced Advantage Fund last year in August. The scheme manages its asset allocation dynamically based on valuations and some other parameters. SEBI does not have asset allocation upper and lower limits for dynamic asset allocation funds or balanced advantage funds. In other words, equity and debt allocations of the scheme can range from 0 – 100% depending on market conditions.

Why invest in Balanced Advantage Funds?

The age old stock market wisdom, “buy low, sell high”, is easy to understand but difficult to execute for most investors. SEBI monthly data over the last 5 years show that monthly inflows in equities are higher when Nifty valuation is higher and vice versa. This shows that most retail investors do the opposite of “buy low, sell high”. If you buy when valuations are high and miss out on buying when valuations are low, you may get sub-optimal returns.

Timing the market i.e. predicting when / at level prices will peak or bottom is very difficult because short term prices are driven by sentiments. Even predicting which asset class (i.e. equity, debt etc.) will outperform or underperform in the short term is difficult because winners keep rotating between asset classes (see the chart below).

Source: National Stock Exchange, Advisorkhoj Research, 1^st Jan 2011 to 31^st December 2021. Equity: Nifty 50 TRI; Debt: Nifty 10 year benchmark G-Sec Index. Disclaimer: Past performance may or may not be sustained in the future.

Balanced Advantage Funds use a systematic valuation based approach which is suitable for generating consistent and risk adjusted returns across different market conditions over sufficiently long investment tenures.

Asset allocation of the SBI Balanced Advantage Fund

• Net long Equity: This is the un-hedged equity exposure of the fund. Net equity allocation is determined by the fund managers, using parameters such as Sentiment Indicator, Valuations &Earnings Drivers. The net long equity allocation of the scheme is aimed at providing long term capital appreciation (wealth creation) for investors.


• Debt: Debt allocation is also determined by the fund manager using the above parameters and capped at 35% to ensure equity taxation. The debt allocation will provide stability in volatile markets.


• Arbitrage: This is the fully hedged equity component but generates arbitrage (risk-free) profits based on price differences in cash and futures market or corporate actions. The arbitrage component reduces the net long equity exposure and at the same time, helps to keep the gross equity exposure above 65%, which enables equity taxation.

What is the dynamic asset allocation of SBI Balanced Advantage Fund?

• The broad allocation towards equityis determined by sentiment indicators and valuations


• Sentiment indicators: Breadth of the market, Retail participation, MF flows, Primary market activities, etc.


• Valuations: Trailing PE, Shillers PE, Earnings Yield / Shillers Earnings Yield, Bond Yield Spread etc.


• Allocation band for equity is decided on the basis of various macro inputs like fiscal/ monetary positions, real rates, monetary policy framework, variables of offshore markets, etc.

Where SBI Balanced Advantage Fund invests?

The scheme has a quantitative framework the top down investment strategy in terms of the market cap allocation, investment style (growth / value / quality), sector preference etc. Stock selection is based on fund manager’s conviction. The fund manager uses model portfolios based on thehighest conviction ideas of the SBI MF analyst team. The debt portion of the scheme portfolio is of high credit quality / sovereign securities to maintain liquidity. The fund manageractively manages duration to generate alpha across the yield curve.

How has SBI Balanced Advantage Fund performed?

4 – 5 months is too short a period to evaluate the performance of a mutual fund scheme. However, the performance of SBI Balanced Advantage Fund in volatile markets shows that the dynamic asset allocation model has the potential to limit downside risks.

Source: Advisorkhoj Research

Why invest in SBI Balanced Advantage Fund?

• Though fears of major disruptions due to the Omicron variant of COVID has receded there are still lingering concerns about the effect it will have on the economy.


• Tapering of the bond buying program by the US Fed has been discounted by the market. The effect of potential rate increases in the US on financial markets especially in emerging markets like India can cause volatility.


• Equity valuations seem over-stretched. In such market conditions a systematic model based asset allocation approach seems suitable.


• Dynamically managed Asset allocation basis the market outlook will remove emotional biases and balance risk / reward.


• Uniqueness of the asset allocation range i.e., from 0 – 100% for both debt & equity will provide flexibility across different market conditions


• Expertise of SBI Mutual Fund investment team

Who should invest in SBI Balanced Advantage Fund?

• Investors looking for long term risk adjusted returns


• Investors looking for a dynamic solution for the right mix of debt and equity


• Investors who do not have high risk appetites. This scheme is suitable for investors with moderately high risk appetites.


• Investors with minimum 4 – 5 years of investment horizon

Investors should consult with their financial advisors if SBI Balanced Advantage Fund is suitable for their investment needs.