In the complex world of mutual funds, where every decision holds potential financial implications, finding the right investment avenue can be challenging. Balanced advantage funds (BAFs) emerge as a relatively stable option, offering investors a balanced mix of equity and fixed income exposure that adapts to market dynamics. Today, we’ll delve into BAFs through the lens of two big players—HDFC Balanced Advantage Fund (HDFC BAF) and ICICI Prudential Balanced Advantage Fund (ICICI PRU BAF).
What is a BAF?
A BAF, or a dynamic asset allocation fund, invests in both equity and debt, and rebalances between them periodically. The idea is to give you a less volatile experience than a pure equity fund. BAFs are generally taxed as equity (10% long-term capital gains, or LTCG, after 1 year) since they generally take a 65% equity exposure at the gross level. However, they typically use derivatives to hedge part of this exposure when the markets rise. “The dynamic asset allocation category is expected to be a go-to fund, an all-weather fund for all kinds or investors,” says Nirav Karkera, head of research at Fisdom, a wealth-tech platform.
On 4 February, HDFC BAF completed three decades in the industry. Known as HDFC Prudence Fund until 2018, HDFC BAF has evolved from a monthly dividend-focused strategy to one emphasizing bottom-up analysis, quality and valuation at the stock level. Recently, it introduced arbitrage to adjust net equity levels dynamically, discontinuing the previous static equity allocation approach. Whereas ICICI PRU BAF has honed its dynamic management approach well before Sebi categorization.
Over the years, HDFC BAF has garnered attention for its steadfast, low-churn strategy, contrasting with the more dynamic approach of ICICI PRU BAF. Functioning more like an equity fund with fixed income as a supplementary component, HDFC BAF aims to optimize returns through equity investments while adjusting exposure dynamically to navigate market uncertainties. In contrast, ICICI PRU BAF operates with a well-defined model based on its in-house valuation index, and also utilizes arbitrage to manage equity levels within a range during market fluctuations. While HDFC BAF may offer better returns, ICICI PRU BAF has shown superior performance from a risk-adjusted perspective.
Apart from these, there are other BAF models in the market as well. For instance, one might draw parallels between Edelweiss BAF and ICICI PRU BAF—the former adopts a momentum strategy while the latter prioritizes valuation.
Historically, HDFC BAF has maintained higher net equity levels compared to ICICI BAF. This is primarily due to HDFC BAF’s active stock-picking approach, which strategically allocates a larger portion of assets to equities. Conversely, ICICI BAF adopts a countercyclical approach with a more cautious stance, balancing equity and debt allocations based on market valuations and risk assessments.
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Data reveals compelling insights into each fund’s performance and risk metrics. HDFC BAF exhibits relatively stronger performance during bullish market phases, evident from its impressive trailing returns over 1 year, 3 years and 5 years. Conversely, ICICI PRU BAF shines during bearish periods, showcasing its ability to mitigate risks effectively.
HDFC BAF has better trailing returns. Despite having relatively similar expense ratios, it demonstrates significantly higher returns compared to ICICI PRU BAF due to its investment strategy, generating higher post-expense returns for investors.
If we look at P2P (point-to-point) returns over the past 5 years, HDFC BAF has exhibited higher returns in comparison to ICICI PRU BAF, except for the first two years where the latter outperformed. This variance in performance can be attributed to differences in their management styles and strategies.
Metrics like returns and risk also help investors understand each fund’s performance. HDFC BAF shows consistency over time, while ICICI PRU BAF has proved its ability to manage risks effectively.
Deciding which is better for you depends on your risk appetite. If you want a smoother ride, ICICI PRU BAF has historically delivered on this better than HDFC BAF. However, if you want higher returns and see the bull market strongly continuing, then HDFC BAF might be right for you.