LIC Mutual Fund Launched Balanced Advantage Funds (BAFs): Should One Invest?

LIC Mutual Fund has recently launched a new balanced advantage fund (BAF) that will invest in equity, debt, and money market tools. BAF is kind of a hybrid mutual fund, that invests both in equities and debt for better profitability and lesser risk exposures. BAFs are also known as dynamic asset allocation schemes, that use multiple instruments to determine which stocks seem lucrative. Here, LIC mutual fund is now also planning to reduce the volatility by staying in the field of BAFs by sticking between both equity and debt. LIC BAF will be benchmarked against the LIC MF Hybrid Composite 50:50 Index, where the index is structured with equal weightage to Nifty 50 and the 10-Year G-Sec Index.

Equity-debt management model

Factors like where to invest and how much to invest in stocks and bonds are important for BAFs. LIC BAF is having their in-house model to determine this portfolio of equity-debt management, where interest rates, 1-year forward price-earnings ratio, and earnings yield have been taken up as significant factors.

While it comes to the question of the equity allocation, LIC BAF will invest highly in the large companies, whilst coming on the fixed-income ground, LIC BAF will prefer the high-quality bonds issued by governments, public sector undertakings, and the AAA-rated private sector corporates.

With a hike in interest rate, the equity market generally sees correction and vice versa. Commenting on that, Yogesh Patil, Head-Equity, LIC Mutual Fund said, "The inverse correlation between equity and interest rates is core to our asset allocation model. Forward price to earnings multiple bands arrived at using interest rates and earnings yield help to increase allocation to equity when it is attractive, and reduce when it has run-up." That makes the scheme interesting.

Patil added, "The scheme can take advantage of the sharpest moves in stock markets that may be short-lived. So a flash crash can be used to deploy more money in equity. Also, equity can be sold in a flash up-move." On the other hand, to avoid over-trading, asset rebalancing will be done only when the recommended allocation changes by at least 2% points.

BAFs usually maintain gross exposure to the equities at around 65% percent, to ensure the scheme is treated as an equity fund for taxation. BAF lately has given quite good risk-adjusted returns. So, if your interests are staying around BAFs, then you can look out for some other BAFs also, that are already operating in the market with good records. LIC BAF can be an additional lookout for you. The LIC BAF offer will be closed on November 3, this year.

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(Also read: What is SIP And Should You Start Investing Now?)