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Investors who are unsure and confused about the stock market’s direction after its record-breaking run should consider balanced advantage funds, which invest in a mix of debt and equity.

Balanced advantage funds (BAFs) are a hybrid mutual fund that invests in both equities and debt. BAFs must always hold a minimum of 65% of their assets in gross equity to be taxed as equity funds.

This means that if they are redeemed within one year, capital gains on them are taxed at 15%. Capital gains on BAFs are taxed at 10% on gains exceeding Rs 1 lakh if redeemed after one year. Typically, BAFs employ derivatives such as futures and options to mitigate unhedged equity exposure as determined by the fund manager.

The ace equity mutual fund data shows that in the last one-year mutual fund houses such as HDFC Balanced Advantage Fund, Nippon India Balanced Advantage Fund, and Aditya Birla SL Balanced Advantage Fund has given returns of 62%,30%, and 29% as on 13 October 2021.

That said, recently LIC mutual fund has announced to launch LIC MF Balanced Advantage Fund. The scheme is an open-ended Dynamic Asset Allocation Fund that invests across equity and debt & money market instruments using several parameters like valuation and earning drivers.

Investment strategy

The scheme will be run on a unique ‘Fundamental Driven Mathematical Model.’ The LICMF BAF model would exactly utilise to estimate the scheme’s optimal asset allocation level. The model calculates the optimal asset allocation level using interest rates, the one-year forward Price Earnings ratio, and the Earnings Yield.

As underlying fundamentals change, the model automatically adjusts asset allocation between equity and debt. However, the equity and debt portfolios will be actively managed by experienced fund managers.

The model is constructed in such a way that it automatically incorporates changes in any of the parameters on a real-time basis and continuously adjusts the Price to Earnings band via Linear Progression.

Management views

As per the management, LICMF BAF would assist investors in participating in the market rally and seek to minimise downside risk, which is a critical component of any investment strategy.

Explaining the dynamics of this model-based unique investment approach for the new fund offer in LIC MF BAF, Mr. Dinesh Pangtey, CEO, LIC Mutual Fund Asset Management said: “Bond yields, in a way, represent the opportunity cost of investing in equities and perception of risk appetite. We at LIC MF would be using this inverse relationship between equity and debt in LICMF BAF for switching from equity to debt and vice versa, based on Fundamental Driven Mathematical Model.”

The fund managers for LIC MF BAF will be Yogesh Patil for the Equity portion and Rahul Singh for the Debt portion.

What should investors know?

-The fund falls under the ‘high risk’ category, and investors should consult their advisors to check the product suitability.

-The objective of LIC MF BAF is to achieve optimal asset allocation through a fundamentally based mathematical model.

– LICMF BAF is a Dynamic Asset Allocation Fund that seeks to create returns primarily through asset allocation, thereby mitigating the impact of market declines.

– Maximum total expense ratio (TER) permissible is up to 2.25% as per Sebi regulations.

-The LIC MF BAF will be compared to a customised index, the LIC MF Hybrid Composite 50:50 Index.

– The fund will keep gross equity allocation 65% or above to enable investors to avail equity taxation benefits.

-The scheme has no entry load; however, an exit load of 12% would be charged if the units allotted shall be redeemed or switched out without any exit load, on or before completion of 12 months from the date of allotment units.