Balanced Advantage Funds, also known as Dynamic asset allocation funds are a category of mutual fund schemes where the fund manager has a flexibility to heavily move the exposure between debt, equity & arbitrage.
Unlike aggressive hybrid funds where the equity exposure has to be a minimum of 65% of the portfolio, balanced advantage funds move the exposure dynamically from 30%-80% in equity depending upon the market conditions.
We have discussed everything about the basics of how the balanced advantage funds operate in the previous post. There are over 20 mutual fund houses offering balanced advantage funds to investors. However, each one of the schemes, though sounds similar, are very different from each other.
It becomes very important to understand the dynamics of the scheme by evaluating each one separately. Some schemes rebalance on a daily basis while others do it on weekly or monthly basis. Some schemes invest in short duration debt only while other schemes take long duration calls too.
In this post, we are going to discuss the Edelweiss balanced advantage fund. I met the fund manager of this scheme in September 2022 & this post is based on the discussion I had with Mr. Bhavesh Jain, Fund Manager, Edelweiss Balanced Advantage Fund regarding how this scheme is managed & how it is different from the other schemes in the same category.
Edelweiss Balanced Advantage fund has a range of 30-80% in equities and remaining in debt & arbitrage. The fund maintains equity status by keeping the equity exposure above 65% (hedged + unhedged). Hedging is done through the nifty 50 index future. It follows a pure trend based asset allocation model. The fund manager has three important indicators to decide the equity exposure.
Short-term market trend: Fund manager uses 5 Day Moving Average & 10 Day Moving Average on the nifty to predict the short term trend of the market. This indicator carries a weight of 17% (we will discuss more about the weights later).
Long-term market trend: Fund manager uses 50 Day Moving Average & 100 Day Moving Average on the nifty to predict the long term trend of the market. This indicator carries a weight of 17%.
Volatility: Fund manager uses the volatility indicator to check the velocity of the trend. This indicator carries a weight of 16%.
These 4 indicators decide the equity exposure range of 30% - 80%
- If all the indicators are negative then the fund will have 30% equity exposure and remaining 50% will be hedged via nifty futures only.
- If one of the indicators is positive then the fund will have 47% (30% + 17%) equity exposure and the remaining 33% will be hedged.
- If two of the indicators are positive then the fund will have 64% (30% + 17% + 17%) equity exposure and remaining 16% will be hedged.
- If all indicators are positive then the fund will have 80% equity exposure with 0% hedging.
Let’s understand this with an example.
Suppose the short term indicator is negative but long term indicator is positive & volatility is also under control then the fund will have exposure of 64% in equity & remaining in debt & arbitrage. Arbitrage position is created by shorting nifty futures to the tune of 16% of fund value.
Rebalancing cycle: Edelweiss balanced advantage fund follows a daily rebalancing model. Based on the above indicators, the fund manager takes a call at 3 PM during market hours regarding the hedging of equity exposure. Most of the schemes in the balanced advantage category have a weekly or monthly rebalancing. This is a one of its kind fund that manages the exposure in such a dynamic manner.
Interesting thing to note is that even after having the daily rebalancing activity, the transaction cost is less than 0.03% of the total asset under management.
Debt exposure: Scheme has a minimum exposure of 20% in fixed income securities. Entire exposure is AAA rated instruments with an average maturity of 1 - 3 years.
Another interesting thing to note on the debt exposure is that Edelweiss balanced advantage fund has signed an agreement to never invest in either equity or debt instruments of Edelweiss group.
Personal opinion: I spoke to Mr. Bhavesh Jain for around 15 minutes on this scheme. He is a very straightforward & clear communicator of his ideas. He has been managing the scheme since August 2013. He has been there for quite long & has demonstrated consistency in returns since he took over. A moderately aggressive investor can consider this scheme for his portfolio after researching further & consulting his/her financial advisor.
Disclaimer: No product or scheme mentioned in the above article can be construed as investment advice. Writer of this article is an AMFI Registered – Mutual Fund Distributor. One should consult their financial advisor before making a buy/sell decision about the above mentioned scheme.
CA Rohit J. Gyanchandani is Managing Director, Nandi Nivesh Private Limited, A Pune based Wealth Management Company.
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