Sundaram Balanced Advantage Fund can be a good investment in volatile markets

What is Dynamic Asset Allocation

Dynamic Asset Allocation changes equity and debt allocations of the portfolio based on market conditions. Dynamic Asset Allocation models usually increase asset allocation to equity and reduce allocation to debt, if equity valuations fall. If equity valuations increase, then dynamic asset allocation models reduce allocation to equity and increase allocation to debt. The aim of dynamic asset allocation is to reduce downside risk and generate risk adjusted returns. Balanced Advantage Funds are hybrid funds which dynamically rebalance their asset allocation between equity and debt based on dynamic asset allocation model.

How Balanced Advantage Funds work

• Net or Active Equity: This is the un-hedged equity exposure of the fund. Net equity allocation is determined by a quantitative dynamic asset allocation model based on market conditions.


• Fixed Income: Fixed income allocation is determined by the asset allocation model but is usually capped at 35% to ensure equity taxation.


• Arbitrage: This is the fully hedged equity component which is not exposed to market risks but generates arbitrage (risk-free) profits based on price differences in cash and futures market or corporate actions. The arbitrage component reduces the net equity exposure and at the same time, helps to keep the gross equity exposure above 65%, which enables equity taxation.

Sundaram Balanced Advantage Fund

Sundaram Balanced Advantage Fund works on the dynamic asset allocation strategy based on market valuations. The dynamic asset allocation model of the fund defines valuation bands and corresponding asset allocation ranges for each band. Valuation bands are based on Trailing Twelve Months (TTM) Nifty Price Earnings (PE) multiples. PE bands work better than absolute PE levels because it gives the fund managers some flexibility of managing asset allocation changes within the band. Having valuation bands also reduces impact cost of sudden asset allocation changes and volatility of returns.

Sundaram Balanced Advantage was launched in March 2020 just before the stock market crashed due to the first wave of COVID-19 pandemic. The scheme has Rs 1,004.71 Crores of assets under management (AUM) as on 29^th June 2021. The expense ratio of the scheme regular plan is 2.37%. Bharath S, Rahul Baijal and Dwijendra Srivastava are the fund managers of this hybrid scheme. The chart below shows the growth of Rs 10,000 investment in the scheme since its NFO. The fund gave 27.62% CAGR return since inception.

Source: Advisorkhoj Research. As on 22^nd July 2021

The chart above displays some of the key benefits of the Balanced Advantage Funds:-

• Captures equity market upsides – Sundaram Balanced Advantage Fund gave 27.62% CAGR returns since inception.


• Limits downside risks – You can see the scheme saw much smaller drawdowns compared to Nifty


• Improves risk adjusted returns – Since the scheme follows the tenet of buy low (increase equity allocations when PE is low) and sell high (reduce equity allocations when PE is high), it has the potential to improve risk adjusted returns

Monthly Returns of Sundaram Balanced Advantage Fund since NFO

Source: Advisorkhoj Research. As on 30^th June 2021

How Equity Allocation changed in the last 9 months

Sundaram Balanced Advantage Fund increases equity allocations (reduces debt allocations) when Nifty PE declines and vice versa. The chart below shows, how the equity allocations of the scheme changed with change in Nifty 50 PE.

Source: Sundaram Mutual Fund, Advisorkhoj Research. As on 30^th June 2021

SIP Returns

The chart below shows the returns of Rs 10,000 monthly SIP in Sundaram Balanced Advantage Fund since NFO.

Tax Advantage

One of the biggest benefits of Balanced Advantage Funds is that they enjoy equity taxation – short term capital gains (investment held for less than 12 months) are taxed at 15%, while long term capital gains (investment held for more than 12 months) up to Rs 1 lakh are tax free – long term capital gains in excess of Rs 1 lakh are taxed at 10% only. There is no Dividend Distribution Tax (DDT) on mutual fund dividends, but dividends paid bymutual fund schemes are taxed as per the income tax rate of the investor.

Outlook

While equities have given excellent returns in the last one year, there are some near term uncertainties which may worry investors. Some of the major near term concerns are, rising commodity prices and high inflation, uncertainty about the impact of a possible 3^rd wave of COVID and pace of corporate earnings recovery. On the global front, there are concerns about the impact of tapering of US Fed bond purchase program, whenever it happens. On the positive side, we are likely to see pickup in industrial growth as more COVID related restrictions are gradually lifted by the State Governments. There is also pent up demand, which may result in higher sales and earnings for corporates. As such we may see bouts of volatility, though the long term growth prospects are favorable.

Conclusion

Balanced advantage funds are good investment options for investors who do not have appetite for high volatility. Suggested reading What should you do when the stock markets are at high level

In this blog post, we discussed how Sundaram Balanced Advantage Fund limits downside risks and provides stability based on its dynamic asset allocation strategy. Investors should have long investment horizon to get the superiorrisk adjusted returns from this fund. Investors should consult with their financial advisors if Sundaram Balanced Advantage Fund is suitable for their investment needs.