If there is one category of mutual fund which has elicited extremely high investor interest in the last 5 years, it has been the dynamic hybrid funds which are sub categorised further into balanced advantage funds and multi asset funds. The dynamic asset allocation pattern of these funds has immensely attracted investors due to the design which ensures better risk mitigation.
The pandemic induced market fall in the early part of 2020 did set a strong foundation for these two categories when investors were concerned about the correction in the markets and clueless about the direction the markets would take from there.
Balanced advantage funds (BAFs) invest in a dynamic mix of equities, arbitrage opportunities and debt instruments to take advantage of the opportunities offered by these instruments, yet offering the taxation advantage of equities.
Similarly multi asset funds (MAFs) invest in a dynamic mix of equities, arbitrage opportunities, debt instruments and commodities (predominantly gold in the case of most AMCs).
These categories of funds bode well for conservative investors who have lesser appetite for risk or lack experience in equity investing and so wish to take only moderate exposure into equities.
The category of dynamic asset allocation funds or balanced advantage funds hold Rs. 2.49 lakhs crores of AUM and multi asset funds hold Rs.67000 crores as on 31st March 24. Just 4 years back in March 2020, the AUM of balanced advantage funds was just Rs.77,100 crores and a mere Rs. 9439 crores for multi asset funds. This is a more than 3 times growth of AUM for balanced advantage funds and over 6 times surge for multi asset funds. The numbers more than display the growing faith of investors on these schemes.
It's no surprise that every AMC wanted to take a piece of the opportunity in a buzzing category and launched funds in these two categories most of which were launched in the last 4 years. But each AMC chose its own structure for these funds to attract investors with some unique features. So though by name they would have the same suffix ‘Balanced Advantage Fund’ and ‘Multi Asset Fund’ following the AMCs name, investors who presumed them to be similar in nature based on the name would not know there are stark contrasts between the schemes within the same category.
Different AMCs use different parameters to arrive at the allocation to be given to each asset class and employ different strategies as well. While there are Balanced Advantage schemes that would take equity exposure in the inverse direction to the market valuations, there are few in the category that take weightage to equity in direct proportion to the valuations.
Among balanced advantage funds there are AMCs which use Price to Book (P/B) as the measure of valuation to determine the equity asset allocation whereas there are few funds which consider Price to Earnings (P/E) and some others which use a combination of both and few use various other parameters. AMCs like ICICI Prudential use Price to Book as the measure of valuation to determine the equity allocation to be taken by the fund. ICICI Pru Balanced Advantage Fund takes lower exposure to equity when the P/B is high and vice versa.
HDFC Balanced Advantage Fund takes the trailing twelve month PE ratio together with the Earnings Yield/G-Sec Yield to determine the equity allocation. This fund takes a relatively aggressive call on equities .
Edelweiss Balanced Advantage Fund aims to have higher equity exposure during the bull market and lower in the bear market. Additionally, SBI Balanced Advantage takes a conservative approach to equity allocation like ICICI Pru BAF.
The high contrast in the nature of the BAFs of various AMCs vividly reflects in their net equity exposure and thereby the returns. As on 31st March 2024, the BAFs of ICICI Pru, Nippon, HDFC, SBI and Baroda BNP AMCs had a net equity exposure of 41.4%, 54.79%, 55%, 32.64% and 60.41% respectively. The one year return of these funds as on 31st March 24 were 22.9%, 24.63%, 40.5%, 26.26% and 28.21% respectively
A layman who presumes the balanced advantage funds of various funds to be similar in nature and attributes would be grossly wrong in the assumption given the above facts.
As pointed out in the category of balanced advantage funds, multi asset funds of various AMCs also are different from each other and the difference is even more in this category. As in the case of balanced advantage funds, while the equity allocation methodology and thereby the weightage to equity taken by multi asset funds of each AMC is different, there is an additional distinction in the taxation aspect also.
As per current taxation rules, if a fund has less than 35% equity exposure, the long term capital gains will be taxed at the applicable marginal tax slab of the investor, if the equity exposure is 35% to 65% the long term capital gains after 3 years will be taxed at 20% with indexation and if the equity exposure is above 65% the long term capital gains after 1 year will be taxed at 10%.
Multi asset funds of various AMCs are so different in the equity exposure as compared to balanced advantage funds such that they even fall under different taxation mentioned above. For example, multi asset funds of ICICI Pru, HDFC, TATA and Baroda BNP hold more than 65% in equity and so their long term capital gains are taxed at 10% after 1 year.
On the other hand MAFs of UTI, Quant, Nippon and SBI have their equity exposure within 35-65% and so their long term capital gains after 3 years will be taxed at 20% with indexation. Each of their exposure to commodities and types of commodities, arbitrage and debt also have stark differences. Some MAFs like that of Nippon take meaningful exposure to global equity too. It's natural that these differences in structure and strategy reflect in their performance. The 3 year CAGR of Quant, ICICI Pru, UTI, Nippon and TATA MAF are 31.03%, 24.23%, 17.47%, 16.80% and 15.48% respectively.
Given that a large number of customers who invest in these categories of funds are first time investors or conservative or less informed, it is even more important that they get complete clarity about these funds and choose the one that exactly suits them. A wrong choice within the category like landing up in an aggressive fund while the intent was to opt for a conservative one or expecting the tax to be 10% after 1 year but landing up with a fund which would tax the gains up to 3 years in the applicable tax slab and 20% with indexation post that will give a very bitter experience to a customer.
While there can be an argument that there are various types of BAFs and MAFs to cater to varied expectations of customers , to avoid confusion it may be necessary to have sub categorisation under such categories of funds or have the taxation and equity allocation structure indicated along with the scheme name to guide the investors clearly.
When there are sections of investors who invest directly without expert guidance, such clarity is very essential so that the investment objective of the investors is met without ambiguity. Investors who invest directly also need to bear in mind that there are so many factors such as these differences which are not visible to them when they choose funds and so may have to reckon the need to take expert guidance to declutter, to invest with clarity.
V.Krishna Dassan, Director, Dhanavruksha Financial Services Pvt. Ltd.
