Best balanced advantage funds to invest in right now

Equity valuations in India are rising again after some moderation in the second half of 2022 and the first half of the 2023 calendar year. For example, the benchmark BSE Sensex is valued currently at nearly 25 times its trailing 12-month earnings per share.

In comparison, the index valuation had fallen to a low of 21X in the second half of the 2022 calendar year. The BSE Mid and small-cap indices are even more richly valued at trailing price-to-earnings multiples of around 27.5X and 32X, respectively. Incremental or fresh investment in equities at higher valuation increases the downside risk for investors. While domestic investors remain bullish on equities despite higher valuation, quite a few investors have been deterred by a sharp rise in valuation in the last three months.

They are waiting on the fence for a decline in valuation to make a fresh investment in equities. In simple words, this is called market timing or buying on dips. If you can get the timing right, this strategy can generate superlative profits, but investors also run the risk of missing the bus if the stock prices rally further from current levels. In the past, the Sensex earnings multiple has gone up to as high as 29X in the pre-Covid period and 35X during the post-Covid period.

A safer option for risk-averse investors is to invest in hybrid funds or balanced advantage funds (BAF).

While these funds invest in stocks and shares like regular equity mutual funds, they mitigate the downside risk by shorting a part of their exposure in equities. 

For example, if a BAF has invested 60 percent of its corpus in equities, 20 percent of it may be in the firm's short or sell position in the futures or option segment. So the net long-position in equity for the fund will be only 40 percent. The ratio of long to short position equities is dynamic and based on the internal valuation model of the fund house or the fund manager. Besides, these funds also invest in bonds, fixed-income assets, and even gold. This ensures these funds perform better than pure or long-only equity mutual funds during a market correction. Overall, the year-on-year returns from BAF are steadier and less volatile than other equity funds.

This doesn't mean that balanced advantage funds have given sub-par returns to their investors in the past.

In the last five years, balanced advantage funds have given annualised returns of 11.7 percent to investors on average which is quite impressive considering their low-risk profile.

In the last year, 21 BAFs under operations have delivered 23.7 percent returns, at par with the rise in the BSE Sensex during the period. The top-performing BAFs have done even better and have beaten the benchmark thanks to their hybrid investment style where they try to make money on both sides of the market movement.

Also Read: Five top-performing retirement mutual funds

Here are the top five balanced advantage funds that have delivered the highest and the most consistent returns to their investors in the last five years. These funds also score highs in terms of risk-adjusted return parameters such as the Sharpe Ratio and the Sortino Ratio.

1. At the top of our list is HDFC Balanced Advantage Fund, the category leader and one of the biggest equity schemes in the county with assets under management (AUM) of nearly Rs 77,000 crore currently. It has been one of the top-performing funds with 41.1 percent returns in the last one-year and 5-year compounded annual returns (CAGR) of 19.84 per cent higher than many pure equity schemes.

2. Baroda BNP Paribas Balanced Advantage Fund is second best in our list with 26.7 per cent returns in the last one-year and 5-year CAGR returns of 15.8 per cent. The fund with an AUM of around Rs 3700 crore also scores high on Sharpe and Sortino ratio.

3. Tata Balanced Advantage Fund is next on our list with a 23.4 per cent return in the last one-year and 5-year CAGR returns of 13.3 percent. The fund currently has an AUM of around Rs 8500 crore.

Also Read: Best fixed deposit (FD) options for investors right now

4. Edelweiss Balanced Advantage Fund is the fourth best fund in its category in our list. The fund with an AUM of around Rs 10,350 crore currently has delivered 25.2 per cent returns in the last 12 months and has given annualised returns of 15 per cent in the last 5 years.

5. ICICI Prudential Balanced Advantage Fund is the fifth and the last fund on our list. It is one of the oldest funds in the category with an AUM of Rs 54,000 currently and has been a consistent performer in the past. The fund has delivered 21.3 per cent returns in the last one-year and annualised returns of 13.5 per cent on average in the last five years.

Happy Investing!

(Karan Deo Sharma is a Mumbai-based finance and equity markets specialist).

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