WF: Advisors face a big dilemma today: a disciplined product like BAF has been reducing net equity exposure substantially from 77% in Jan 2016 to 57% by August 2016, reflecting the rise in market valuations. Some market experts however talk of a big bull market ahead, arguing that Indian market valuations in the context of negative yields in the developed world, are not at all high, and must not be considered from a historical perspective. Amidst this, advisors are seeing heightened investor interest in equities, as markets continue to rise. How should advisors read these seemingly conflicting stances between BAF and the market re-rating argument and how should they guide investors now?
Amar: To start with, BAF strives to keep an investor away from market extremes. As a result, the fund model is based on price-to-book (P/B) and not on price-to-earnings (P/E). On P/B basis, equity market is currently near to its long term average and hence the equity level in the fund is maintained at 57%.
Back in 2014, when markets were at similar levels as it is today, the equity composition was lower which ultimately proved better for the investor. So the idea is to keep away from sentiments and deliver returns; a strategy which has worked well over the last five years. Hence, we believe the current positioning is optimum for a client who is willing to invest in equities with a controlled risk approach.
Going forward, we believe there may be persistent volatility due to earnings fluctuations, which is likely to assist fund's performance by design. In effect, prudent stock selection within the equity exposure aims to enhance the fund returns.
WF: A core proposition of BAF is a promise of delivering a better investment experience. How has BAF done on this front?
Amar: Over the past six years, the average equity exposure of the portfolio has been 64%, thereby effectively keeping the investors away from extreme volatility weathered in the said timeframe. Even at these reduced levels of exposure, the fund has managed to consistently beat the Nifty index and the benchmark consistently and has delivered alpha as seen in the following table.
So, via this fund, an investor effectively managed to enjoy returns at a reduced risk, making it an attractive alternative to even conservative investors.
WF: Balanced funds have outperformed equity markets in recent years, aided by strong market conditions in equity and debt markets. Some advisors believe that going forward, debt markets may struggle and therefore balanced funds may find it a lot more difficult to beat markets. Do you share this view?
Amar: It is a known fact that asset allocation is the key to long term wealth creation and there will be phases wherein either equity or debt may underperform. However, given the construct of the fund, the fund manager can exploit the opportunities provided by both the asset classes from time to time. Therefore, an underperformance of any one avenue should not be a cause of concern. We believe from an asset allocation viewpoint, there is definitely a place for balanced advantage funds in an investor's portfolio.
WF: SIPs in equity funds are seen as a great strategy to harness market volatility and deliver long term wealth creation. BAF's focus is also to harness market volatility and create long term wealth through a smoother ride. Should BAF therefore be primarily considered for lumpsums and STPs, and equity funds for SIPs? Does a SIP in BAF make sense?
Amar: We recommend lumpsum investment into ICICI Prudential Balanced Advantage Fund as this is where the impact will be better, due to the asset allocation feature. But we have to be mindful of a category of investors whose source of income/cash flow comes on a monthly basis. For this segment of investors, SIP better route for investment. Over the longer term even a SIP is better which can be highlighted below:
Given below is an example of Rs 10,000 invested in ICICI Prudential Balanced Advantage Fund via SIP route
Returns on rolling basis.....
WF: In the monthly dividend + money back feature, does the investor have to trigger the money back option if dividends are not paid out or is this automated?
Amar: It is an automated process and requires no action from the investor's end. If an investor has opted for Money back facility under Dividend option and if no dividend is declared till the 25th day of every month, Moneyback option would get triggered.
WF: The monthly dividend+ money back feature on a product like BAF makes it a compelling retirement income solution. In what ways are you promoting it as a retirement income solution? Is there merit in creating a branded retirement income solution around these features in BAF?
Amar: BAF as a product is for any individual who is risk averse but wants to take exposure to equity markets in a meaningful way, to tap into the growth aspect of equities. Therefore, relegating the product for only a defined segment of users will not be accurate.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
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