ATM :: ‘Balanced’ funds can be a good bet when the bulls are resting

Nikhil Walavalkar, ET Bureau Mar 5, 2014, 04.33AM IST | Economic Times


The new fund offer (NFO) of BOI-AXA Equity Debt Balancer fund is currently open for subscription. The fund will invest in a mix of equity and debt, depending on the valuations of equities, measured by price-earning (P/E) multiple of the Nifty, the market benchmark.

Two existing schemes — FT India Dynamic PE Ratio Fund of Fund (FTIDPF) and Principal Smart Equity Fund — already employ a similar strategy to invest funds. While BOI-Axa and Principal invest in shares and bonds, FTIDPF is a fund of funds that invests in Franklin India Bluechip Fund and Templeton India Income Fund. The allocation to equity and debt is reviewed every month, based on the valuations prevailing in equity markets. Some experts believe the strategy works in the current scenario in the market.

“The equity markets are range bound and expected to remain so in FY14-15. Such funds can be good options in a range-bound market, as they help investors buy on every weakness and book profits on every rise,” says Ankit Swaika, senior vice-president & head-investment advisory & research, Religare Wealth Management.

However, some experts find faults with the strategy. “Though these schemes make a good investment choice for investors who want low volatility, they can underperform if there is a bull rally in the market for a long period,” says Abhinav Angirish, managing director,, an online mutual fund distribution entity. He is bullish on the equity markets in the next three years.

How does It Work?

For example, BOI-AXA Equity Debt Balancer fund will invest 90% of the corpus in stocks if the Nifty is quoting at less than 8 P/E. The fund will invest 80-90% in equities and the rest in debt if the Nifty is quoting at a P/E of 8-12. If the Nifty is quoting above 28 P/E, only 10% of the money will be invested in equities. All these schemes have a different allocation to equity at a particular level of the Nifty P/E.

However, the underlying logic is the same — with rising P/E of the Nifty, the scheme reduces allocation to equities. When the sentiment is bad and equities are quoting low, these schemes load up on equities, they move money into debt when sentiment turns buoyant and equity valuations climb.

This strategy ensures that investors buy equities when valuations are low and they sell equities when valuations turn dearer. Effectively, it helps investors buy low and sell high, keeping their emotions away,” explains Alok Singh, CIOfixed income, BOI Axa Investment Managers. The strategy has delivered well over a period of time.

However, experts ask investors to invest in these schemes only if they want to invest money for a long period. “Investors in such funds should remain invested for at least three years’ time frame, so that the fund sees at least one cycle in equities and debt markets,” says Alok Singh.

Don’t Overlook Shortcomings Being a fund of funds, long-term gains in FTIDPF are taxed at lower of 20.6% with indexation or 10.3% without indexation. Other two schemes are taxed depending on their asset allocation. Schemes with at least 65% allocation to equity are treated as equity funds and there is no tax on long-term capital gains from such funds.

But most of the times, the asset allocation hovers around 50:50 and hence schemes are treated like debt funds for tax purpose. “We treat these schemes like debt funds while advising investors on expected postax returns,” says Ankit Swaika. Apart from adverse tax treatment, these schemes may also underperform during a prolonged bull phase in the market.

“In bull markets, equities typically command high valuations for a prolonged period. Investors in such funds may have to forgo most of the gains, as these funds will have a very low exposure to equities in such phases due to higher valuations,” explains Abhinav Angirish.

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