Learn all about Balanced Advantage Funds with Radhika Gupta
Balanced Advantage Funds (BAF) is a type of mutual fund scheme that invests in both equity and debt instruments and falls under the hybrid mutual fund category. It is important to remember that there is a difference between hybrid mutual funds and balanced advantage funds. Basically, hybrid mutual funds are a broad category under which you can have many funds that invest in both equity and debt instruments. Thus, balanced advantage funds are a type of hybrid fund. These funds dynamically manage their equity and debt exposure such that fund managers can take advantage of market rallies through the equity investments in the portfolio and dynamically increase exposure to debt to protect portfolio downside when markets fall.
Also Read: What are Hybrid Mutual Funds
In this episode of Fun n Learn Fridays with 5paisa, we discuss Balanced Advantage Funds with Radhika Gupta, MD and CEO Edelweiss AMC. In a career spanning over 15 years, Radhika has worked at one of the world’s leading consulting firms (McKinsey & Company), at the world’s largest Systematic Asset Manager (AQR Capital), founded her own alternative asset management firm (Forefront Capital Management), and become the youngest and only woman CEO of an AMC in India and Board Member of the Association of Mutual Funds in India (AMFI).
Entire Interview -
1. Hybrid, as the name suggests, is a mix – in this case, it’s a mix of debt and equity. There are debt hybrid funds, there are equity hybrid funds, and then there are Balanced Advantage Funds. What makes them the star of the category?
Balanced advantage funds have two main attributes that make them the star of the category.
i. They solve the needs of a wide range of investors
ii. They are timeless
The amount of equity in balanced advantage funds can vary between 30% to 90% and can even go above 90% at times. From that perspective, it gives you exposure to the two main asset classes, i.e., equity and debt and takes care of how much to invest and when to invest.
Most people invest with the objective of generating returns while protecting their portfolios from extreme losses. BAF solves these twin objectives very well. Also, we all know that if we want to create wealth, we should ideally stay invested for a long period of time. However, when markets correct, it can become very challenging to stay put in the market. BAF can help investors stay put as it smoothens the volatility caused by equities.
2. Often when we read about Balanced Advantage Funds, there are some key phrases that pop out – all season fund, your partner in market ups and downs, etc. What does this really mean? How is BAF managed and how is the allocation moving? Also, how can we choose the best balanced advantage fund?
When you are looking to invest in the best balanced advantage fund, there are three things that you must focus on:
· How the fund chooses between equity and debt: In most established BAFs, the exposure to equity and debt is model driven. This means that the fund manager does not really take a call on how much to invest in equities and how much to invest in debt. This is a good thing because humans are inherently biased and these biases can have a negative impact on investment decision making. The formula for deciding allocations could be P/E, market momentum, or even proprietary in nature. However, it will impact the type of markets you do well in and the type of markets in which you do not do well. Many BAFs have documentation on this formula and methodology and, while choosing the best BAF, this is something that you must review.
· How is the equity portion being managed: This is similar to understanding a large-cap mutual fund or a mid-cap equity fund. Look at the number of stocks in the portfolio, understand whether the fund manager is following a growth strategy or a value strategy, etc.
· How is the debt portion being managed: It is equally important to understand how the debt portion of the fund is being managed. Since the debt portion is primarily for downside protection, you must ensure that it does not have any credit risk or duration risk.
3. Is it really for every kind of investor? Would a risk averse poet and an aggressive kabbadi player both be able to reap the advantages of Balanced Advantage Funds?
BAF is a great starting point for anyone who is entering equities. To put it simply, it is like the shallow end of the pool as it lets you get your feet wet in equities. Generally, equities are considered as long-term (more than 5 to 7 years) vehicles of growth. However, if you stay invested in BAF for even 3 to 4 years, it is highly probable that you will have a positive outcome. These chances of a positive outcome become even better if you choose to invest in BAF through Systematic Investment Plans (SIPs) since SIPs can help to reduce equity market volatility.
BAF can be used in multiple ways in your portfolio
· For all investors, it takes care of basic asset allocation as it is a mix of two major asset classes.
· For a conservative investor, BAF can be used as a core and can take care of your equity exposure. Basically, it can give you large-cap like exposure but with a little more protection.
· For an aggressive investor, while it cannot replicate the mid and small cap exposure, it can amplify portfolio returns.
· For young investors, who have not yet had any experience with equity markets, it is a great way to start investing in equities.
4. Can BAF become an ideal replacement for Fixed Deposits?
BAF is not a replacement for fixed deposits (FDs) since FD is a fixed-income instrument, i.e., you are guaranteed an income and you will not lose money. From that perspective, BAF has an equity component and it is possible that your investments in BAF can lose money, especially over a shorter time frame of 12 to 18 months. However, over three years, you are likely to have a really good outcome.
While BAF cannot replace FD investments, it is a good starting point for someone who is looking to move out of FDs and into equities.
BAF can also be used as a Systematic Withdrawal Plan (SWP) if you want to supplement your income. While an SIP helps you to systematically invest in a fund, an SWP can help you systematically withdraw your money from a fund. An SWP can help you supplement your current income if you are a working professional or act like a monthly income in case you are a retiree. However, there are two things that you need to take into consideration if you are planning to set up an SWP.
One, don’t start your SWP on day one because you need to give it time to accrue returns. And, two, don’t set up a very aggressive SWP on BAF. An SWP of around 6% should be good.
5. What are the risks in Balanced Advantage Funds?
We must always remember that BAF has an equity component – 50% on average. Thus, BAF can lose money. A good outcome is when the equity market is down 30% and your investment in BAF is down 10 – 12%. A bad outcome is when the market is down 30% and your investment in BAF is down 25%. Also, look at the credit and duration risk in the debt portion of BAF.
The bottom line is that BAF is a 3+ year investment and can have negative returns in 1-2 years.
These Bluechips Have Lagged Behind Nifty 50 Since Last Ganesh Chaturthi
India’s stock markets remain buoyant on the eve of Ganesh Chaturthi and are trading near record highs. Since the festival last year, benchmark indices have jumped more than 50% and many individual stocks have gained far more.
Which stocks did not perform since Ganesh Chaturthi 2020?
Since August 21, 2020, when Ganesh Chaturthi was celebrated last year, the benchmark Nifty 50 index has gained 52.45% from 11,371.6 to 17,342.6. But not all marquee stocks have joined the party with the same gusto and a handful have even been in the red.
If one looks at the stock price data, as many as 24 counters in the 50-stock index have actually underperformed the index itself. These include top public-sector undertakings, energy companies and automobile manufacturers, all of whom were adversely hit by the back-to-back national and regional lockdowns that badgered the Indian economy throughout last year and during the April-June period this year.
- Maruti and other laggards
Among these laggards, shareholders of at least three companies — Power Grid Corp of India Ltd, Hero MotoCorp and Maruti Suzuki—have actually seen their investments lose value over this period.
Maruti, India’s biggest carmaker, lost just over 1.1%. Power Grid, the state-run transmission utility, slipped 8.5%. and Hero Motocorp, India’s biggest motorcycle maker, skid 7.77%.
Other shares in the top 50 have been in the green, but have been outdone by the index by a mile. At least five companies — Britannia, Dr. Reddy’s Labs, Coal India, ITC and NTPC—gained less than 10%, effectively meaning that the index beat them five-fold.
Incidentally, several companies among the laggards are government-owned. Apart from Power Grid, Coal India and NTPC, refining and oil marketing companies Indian Oil and Bharat Petroleum also lagged behind the index. These two companies registered comparatively modest gains of just 25.89% and 17.52%, respectively.
- Reliance’s performance
Interestingly, billionaire Mukesh Ambani-led Reliance Industries Ltd also underperformed the benchmark index and gained just 17.25% in the period, less than a third of what the Nifty did.
However, this is mainly because Reliance was first of the mark when the stock market revived after the crash of March 2020. The Reliance stock more than doubled from a low of Rs 875 in March 2020 to cross Rs 2,000 apiece in August 2020, thanks to the conglomerate raising billions of dollars from Facebook, Google and many other foreign investors for its Jio Platforms and Reliance Retail units.
LIC IPO: Govt. hires 10 bankers, and other details we know so far
The Narendra Modi government has ambitious plans of raising Rs 1.75 trillion via disinvestment during the current financial year, and is banking on generating a lion’s share of this money from the Life Insurance Corp (LIC) of India.
The government hopes that the initial public offering (IPO) of the insurance behemoth will help it mop up more than half the amount it has targeted to raise from disinvestment this year. If the plans do come to pass, LIC will become not only a money spinner for the cash-strapped government but will also be one of India’s most valuable companies with a market capitalization in excess of Rs 10 trillion.
Here’s a lowdown on the mega public offering and other key pieces of information we know so far.
What’s the size of the LIC IPO?
The government could be aiming to raise anywhere between Rs. 900 billion and Rs. 1 trillion from the IPO. This will make it India’s biggest IPO by a wide margin.
To be sure, the government will retain 90% of the insurer as only 10% of its shares are likely to be up for grabs. In fact, some reports say the government may even split the IPO into two parts with a gap of a few months since it believes the market may not have the appetite for such a large offering.
At what stage is the IPO preparation?
The government has just hired 10 merchant banks to arrange the share sale. These are Kotak Mahindra Capital Company, Goldman Sachs India Securities, JP Morgan India, ICICI Securities, JM Financial, Citigroup Global Markets India, Nomura Financial Advisory and Securities (India), Axis Capital, DSP Merrill Lynch, and SBI Capital Markets.
Hyderabad-based KFintech has been appointed as the registrar and share transfer agent. Mumbai-based Concept Communications has been selected as the advertising agency.
Will foreign investors be allowed to bid for the LIC IPO?
According to reports, the government is looking to allow foreign institutional investors to buy up to 20% in the LIC IPO. This help the mega IPO to sail through as FIIs are a major driver of India’s stock markets.
Is it all smooth sailing for the LIC IPO?
While the government would certainly like to think so, the insurer’s employee unions might be having different ideas.
The All India LIC Employees’ Federation has said that the proposed share sale could result in job losses and adversely affect the company’s infrastructure spending plans.
Rajesh Kumar, the general secretary of the employee’s union, said in an interview to Bloomberg TV that the listing could take away from LIC’s focus on investing in the country’s rural and economically backward people, who need insurance the most. Kumar said that a public listing could force the company, which has been investing into capital intensive infrastructure projects like roads, railways and power for the last 60 years, to look to pump its money into projects that would help it generate and maximise profits. Kumar said his union had written to Prime Minister Modi, protesting the stake sale.
How many employees does this union represent?
Kumar’s union represents only about 4,000 of LIC’s 114,000 employees. But a note of protest by one union could set off a chain reaction, and other employee interest groups could join in.
Can this opposition scuttle the LIC IPO plans?
It is unlikely that the government will go back on its plan to list LIC, but employees of several other government owned companies and banks have in the past protested vociferously when those entities have either been listed or been completely divested.
Apart from several banking unions, those representing employees of Coal India Ltd protested vehemently in 2010 when the company was getting listed. In fact, most employees did not participate in the IPO, a part of which was reserved for them, because of pressure from the unions, thus missing out on what was then a bumper IPO.
PLI scheme for textiles: which stocks can get rerated as govt clears the scheme?
The Indian government has approved the production-linked incentive (PLI) scheme for the textile sector for almost a dozen categories in a move that would boost domestic manufacturing and help local producers with an enhanced incentive structure.
The PLI scheme for textiles is part of the announcement made earlier during the Union Budget 2021-22, with an outlay of Rs 1.97 lakh crore.
What is the PLI scheme all about?
The PLI scheme for textiles seeks to promote production of high-value man-made fibre (MMF) fabric, garments and technical textiles in country. The incentive structure has been formulated to help the industry to invest in fresh capacities in these segments.
It would capture investments under two categories — one dealing with companies willing to invest minimum Rs. 300 crore in plant, machinery, equipment, and civil works (excluding land and administrative building cost) to produce items under the notified lines (MMF fabrics, garment and technical textiles).
In the second part, any company willing to invest minimum Rs. 100 crore shall be eligible to apply for participation.
The government expects that, over a period of five years, the PLI scheme for textiles will lead to fresh investment of over Rs 19,000 crore and result in cumulative turnover of over Rs. 3 lakh crore.
Which textile stocks to punt on?
The move, which was anticipated, fired up textile stocks on Thursday but analysts believe the counters can keep buzzing for a while.
Sumeet Bagadia of Choice Broking said that one can buy Arvind Ltd at the current market price for target up to Rs. 110 to Rs. 115, maintaining stop loss at Rs. 90 a share. “Similarly, one can buy Raymond shares at current market price for short-term target of Rs 480 to Rs 500 maintaining a stop loss at Rs 410,” he added.
Mudit Goel of SMC Global Securities said: “One can initiate momentum buy in Grasim shares for the short-term target of Rs 1,640, maintaining stop loss at Rs 1,550.”
Gaurav Garg of CapitalVia Global also favoured Raymond and added that one can also look at KPR Mill.
Raymond has been able to generate good cash flow from operations last year, and with the PLI scheme the stock is expected to perform well.
KPR Mill, which has been able to maintain consistent revenue as well as operating profit margin growth, is another counter to see action.
Rajiv Kapoor of Trustline also picked Arvind, Raymond, Grasim, Welspun and KPR Mill. He added that Bombay Dyeing, Bombay Rayon Fashions, Nitin Spinners and Gokaldas Exports are among the other likely beneficiaries.
Manyavar owner Vedant Fashions to launch IPO. Check details here
Kolkata-based ethnic wear company Vedant Fashions Pvt Ltd, the owner of the Manyavar brand, has filed its draft red herring prospectus (DRHP) with capital markets regulator SEBI to launch an initial public offering (IPO).
According to the DRHP, the issue comprises only an offer for sale by existing shareholders. The Ravi Modi Family Trust, controlled by the promoter Ravi Modi, is selling 1.8 crore shares while private equity investor Kedaara Capital Alternative Investment Fund and its affiliate Rhine Holdings Ltd are also selling 1.8 crore shares. The Ravi Modi Family Trust owns a 74.67% stake in the company while Kedaara holds about 7.5%.
The apparel company, which also owns other popular brands such as Mohey, Mebaz and Manthan, isn’t issuing any new shares and so won’t raise any capital for its own requirements.
Vedant’s Manyavar brand is a segment leader in the branded Indian wedding wear market. The company expects that the IPO and the public market listing will further enhance its brand image.
IIFL Securities, Axis Capital, Edelweiss Financial Services, ICICI Securities, and Kotak Mahindra Capital are the merchant banks arranging the issue.
Vedant Fashions’ business and financials
According to a CRISIL report, Vedant is the largest company in India in the men’s Indian wedding and celebration wear segment in terms of revenue, operating profit before depreciation, interest and tax, and profit after tax for the financial year 2019-20.
As of 30 June 2021, the company had a retail footprint of 1.1 million sq. ft covering 525 exclusive brand outlets (EBOs), including 55 shop-in-shops, across 207 cities and towns in India. It also had 12 EBOs across the US, Canada, and the UAE. The company aims to double its national footprint over the next few years.
The company operates an asset-light model in respect of its plant, property and equipment. This enables it to achieve a high return on capital employed, with a substantial majority of its sales being generated through its franchisee-owned EBOs. As a result, it doesn’t need to invest in developing manufacturing facilities or a distribution system.
The franchise-owned EBOs accounted for 90-92% of its sales in 2020-21 and the two previous years. Multi-brand outlets, large format stores and online platforms, including its website and mobile app, accounted for the remaining revenue.
For 2020-21, the company’s revenue from operations fell to Rs 564.82 crore from Rs. 915.55 crore the year before. Net profit dropped to Rs 132.9 crore from Rs 236.63 crore. This is not surprising, though, considering that the company—like all other retailers—had to close its stores for several weeks due to Covid-19 lockdowns.
Nifty PE ratio below 5-year average, but PB ratio nearing 5-year highs
As Indian stock market participants debate on whether it is over-valued or not, there are some indicators we may look at or better understanding. Nifty price-to-earnings (PE) ratio is one such indicator even though there are multiple actors to be considered while calculating the market valuation.
The Nifty price-to-earnings (PE) ratio today stands at 26.59 multiples even as the Nifty 50 share index is trading near its all-time high of 17,379.65, which it reached last week. Many market commentators
believe that the Nifty 50 index is over valued at 17500 levels and a crash is impending.
In terms of fundamental reasons, Indian stocks markets have been on a stellar track helped by ample global liquidity, easing lockdown regulations on the back of accelerated vaccination drive and improved
domestic economic growth. Weak US jobs data also seemed to have raised hopes that US government will continue with its liberal policy and economic support.
Nifty PE ratio is still below 5-year average
Nifty PE ratio at 26.59 is way lower than the 5-year high of 42 multiples and slightly lower than the 5-year average of 27.44. The Nifty PE ratio is also lower than the 1-year average of 33.55 and 2-year average of 29.88. Nifty PE ratio is a key indicator to read while understanding the valuation of Indian stock market. PE is short for the ratio of a company's share price to its per-share earnings. To calculate the P/E, you simply take the current stock price of a company and divide by its earnings per share (EPS). P/E Ratio = Market
Value per Share/Earnings per Share (EPS).
Nifty PE ratio moved between a high of 42 and low of 25.21 during the past one year. While on a 5-year basis, Nifty 50 PE ratio moved between a high of 42 and low of 17.15, data from Trendlyne showed.
Does Nifty 50 PE ratio indicate just valuation?
Many market watchers use the Nifty PE ratio to decide on whether the market is overvalued, cheaper or just right. In that sense we have seen a high Nifty PE ratio of 42 in February 2021 when the index reached 15000 levels for the first time. Since then, Indian companies have seen good growth on earnings and we see the Nifty PE ratio more reasonable around 26 multiples. There is also a methodology change in
the calculation. Now Nifty PE ratio is calculated based on consolidated earnings of companies from standalone EPS earlier.
At this stage the market watchers are divided on whether Nifty PE ratio indicates just valuation. Many believe, accelerated economic recovery and ample global liquidity will help both markets and
companies to see positive upside. The other camp believes that from now onwards there will be moderate returns from Indian markets and in case of any global risk off event liquidity will dry up.
Investors should not consider Nifty PE ratio as the only indicator to calculate market valuation but rather look at multiple factors and ratios while deciding on Nifty 50 valuation.
Many old timers quote historical chart and say that Nifty is in the oversold zone when Nifty PE ratio is below 14, while it is overvalued when PE ratio crosses 22. However in the last 17 months the markets have rallied in a different circumstance and a higher sustained PE remained acceptable on hopes of economic recovery and company earnings besides healthy capital inflows.
Nifty PB ratio is still near 5-year high
Another indicator Nifty price-to-book (PB) ratio at 4.39 however near all-time high of 4.48. In the last 5 years it moved between a range of 2.17 and 4.48. The Nifty price to book or Nifty PB value measures the
enterprise value of the company. Many consider Nifty PB value to be more stable than Nifty PE ratio when the market is volatile. Higher PB ratio also indicates that one is paying more in case the value goes
down. From a historical perspective Nifty is seen to be in the oversold zone when Nifty PB is below 2.5 and overvalued range when PB ratio is over 4.