Facts behind their performance and different investment strategies they follow. Might help you look beyond just performance nos and deep dive into reasons behind it.
P.S. Long thread
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So let's start with basics..
What are Balanced Advantage Funds?
They are funds that shift their portfolio investmets between equity and debt, depending on market conditions and aim to provide equity like returns, but with lower volatility.
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How do they help you?
-Take away the need to time the markets
-Protect investments when markets are down
-Help overcome emotional bias while dealing with equity markets and their uncertainty
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How exactly are they managed.
The key strategy is to shift equity levels between 30% to 100% (80% in some funds) based on a predefined model.
The equity levels are reduced by hedging some portion of equity exposure through derivatives.
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Example of how equity exposure is hedged
80% invested in stocks
20% short futures (stock or index)
Net equity (80-20) 60%
Since 80% is invested in stocks the fund qualifies for equity tax. Most funds make sure that investments in stock is above 65% to enjoy equity tax.
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The residual amount, after investing in stocks and derivatives i.e. futures to hedge, is invested in debt instruments which provides some stability to returns.
In nutshell your 100 Rs. is invested across 3 buckets
1.Equity stocks
2.Futures to hedge
3.Debt instruments
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Now let's understand the most important aspect of these funds - Changing equity levels using a predefined model.
What are these models and who makes them?
These are quant models made by respective mutual fund using various factors like PE, PB, DMA, Volatility, etc.
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There are broadly 3 types of models
1. Pure fundamental model which uses factors like P/E, P/B and other market valuations factors.
Funds using these types of models reduce equity levels as valuations are becoming expensive during rising market.
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And increase equity levels when valuations are becoming cheaper when markets are falling.
These types of models are know as counter cyclical models as they bet against the market trend
They allow gradual participation in upside & protection during gradual market downside
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These kind of models may underperform if market continues to trend one way, either down or upwards.
The last fall from 9.5k to 8.5k might result in large fall in nav.
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Also if markets continue to rise despite higher valuations, such funds may miss the rally.
2. The other model is which takes into account fundamentals plus trends.
In such funds, if Nifty valuations are high but trend is bullish, then equity levels can be relatively higher
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Alternatively, when Nifty valuations are cheap but trend is bearish then Equity levels can be relatively lower than a pure fundamental based model.
Such models help overcome limitations of valuations not giving right signal during economic trend reversals like now.
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One drawback of these models is that at times trends and valuations can give conflicting signals which may be a difficult period of such funds in terms of performance.
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3. Pure trend based model that uses market trend indicators like DMAs, volatility and other relative strength indicators.
The aim of this kind of model is to maintain higher equity levels when market is trending higher and have lower equity exposure when market is falling. 1/n
Here I will take some liberty to show how equity levels of Edelweiss Balanced Advantage Fund has moved across different market cycles.
In the below table you may notice equity level in the fund was 40% in March when market was down and then between 60 to 70% during recovery 1/n
Such models are known as Procyclical model that adjust Equity levels according to market trends and usually do better when it comes to protecting downside during sharp market fall and participating in sharp market rallies.
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No wonder funds following trend based models have done well in recent market fall and subsequent recovery.
Such trend based model may not display similar outperformance when markets are not showing any trend but are just moving side ways.
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You may study Edelweiss Balanced Advantage which follows a pure trend based model.
Now that we studied 3 different models may behave differently during each market cycle, set your expectations right.
Each Balanced Advantage Fund is different and have its own pros and cons. All 3 strategies may lead to same destination but the experience may be different.
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Lastly, who should invest in Balanced Advantage Funds?
-If you’re a beginner and not sure about when to invest in equities
-You expect equity like returns in the long run, but with lower uncertainty
-You don’t want to get emotionally drained due to market volatility.
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Who should not invest in Balanced Advantage Funds?
If your return expectations are higher than broader market return potential
You don't mind market volatility in the short term and are able to handle your behaviour well during such times
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For me investing through BAF is like driving a car with seatbelt. They ensure you reach your destination safely.
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They work best when you don't try to time and fiddle with them.
Example 1: Stoping SIP and restarting when markets stabilise
Stopped SIP in March
Did this work?
No: 2.93 lk vs 1.93 lk
Missed opportunity - 1 lk (Savings + Returns) 1/6
Example 2: Starting new SIP only after markets stabilise
Postponed SIP investments after March fall.
Did this work?
No: 90 k invested is worth 1.03 lk
Missed opportunity - 1.03 lk (Savings + Returns)
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One would say these examples look good since markets have bounced back sharply.
Correct, in hindsight this looks good. But, if we go back in history, equity markets have always come out of crisis sharply. And SIPs continued during crisis have recovered even faster.
There's no one right approach to investing that suits everyone, but there's surely one right approach for you. Figure that out, test it and stick to it.
Create your comfort zone which helps you stay calm across different market cycles and stay committed to it.
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One approach in which I have found my comfort zone with and have been following since many years is a 80:20 approach.
80% equity and 20% cash/debt.
When equity falls more than 5% or 10%, I refill it using the cash/debt.
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When equity is rising and going beyond 80% I let it grow (I never time the exit but only entry into equities) and keep investing incremental money in cash/debt so that equity exposure comes down without exiting and disturbing the compounding.
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2004.. I was a part-time off roll employee at a bank, selling loan products. I used to work after my college during 2nd half of the day.
One day my manager kicked me out, I was late to join one campaign as I got stuck at college.
I literally cried when he sacked me and only after I pleaded, he allowed me to join back again.
But I felt terrible for the way I was treated, may be because I was just an off roll employee. Moving out of the building that day I was dejected, but learned some important lessons.
2 years later I was hired as a manager by this bank. On its rolls this time. My eyes were moist, and I was feeling proud when I entered the same building.
A few years later, I went on to head a function at a group company of the same bank.
Technology is nothing new to us.
We have seen how technological inventions have changed the mankind over centuries.
3 biggest technological inventions by mankind..
Steam engine - 1700 it changed the way people travelled.
Electricity - 1879 - it changed the way we live and work
Internet - 1960 - it changed everything
What are the next big revolutions ??
There are many..
Artificial intelligence
Autonomus and electric cars
Cloud computing
Digitisation
They are changing the way we do everything
At the beginning of 1900 virtually no one had driven a car, made a phone call, used an electric light, heard recorded music, or seen a movie; no one had flown in an aircraft, listened to the radio,watched TV, used a computer, sent an e-mail, or used a smartphone.
@EdelweissAMC US Technology Equity FOF invests in JP Morgan US Tech Fund which has strong and consistent performance track record. bit.ly/ustechnfo
It has consistently outperformed its peer group and index in last 10 years.
It has generated over 6% excess returns over peer group average and over 2% over its category index.
Strong performance comes from the strength of JP morgan investment team to identify emerging tech companies in their early stage and ride over their growth.
The fund invests in technologies that are in early adoption stage or are being rapidly adopted.
Essentially it tries to capture the disruption trend early. Below is the technology adoption S curve which shows the life cycle of the product and themes which the fund is focusing