Balanced advantage funds (BAFs) are reducing their equity exposure as the market continues to rise, defying concerns over expensive valuations. HDFC BAF, the largest fund in this segment with assets under management (AUM) of Rs 94,000 crore, decreased its equity exposure to below 50 per cent in July – the lowest at least in the last two years.
Similarly, ICICI Prudential BAF, the second-largest, had only 31.2 per cent of its corpus invested in equities at the end of July, a 20-month low. SBI BAF had an even lower equity holding of 30.9 per cent.
BAFs manage equity and debt allocation dynamically, depending on underlying valuations. Although regulations provide complete flexibility to such schemes regarding allocations, they typically opt for a minimum 65 per cent equity exposure to benefit from the equity tax treatment, which is advantageous compared to debt.
However, BAFs use equity derivatives to reduce their net exposure to below 65 per cent while complying with the taxation requirement at the gross level. The current equity levels are also reflective of the fund houses’ view on the equity market.
In its latest note, SBI Mutual Fund said its proprietary indicator for Indian equities was showing stretched readings amid rich valuations.
“The sentiment index works as a contrarian measure and has an inverse correlation to expected forward returns, especially at extremes, as is the case now. Further, while we stay constructive on earnings in the medium term, the near-term trajectory has been decelerating as commodity price tailwinds abate. This mix we believe is ideal for a reduction in the thus-far-unabated speculative action in equity markets,” it stated.
Currently, the markets across the market capitalisation spectrum are trading at a higher valuation vis-a-vis their long-term averages. The 12-month forward price-to-earnings (PE) ratio of Nifty 50 stands at 20.7 times currently compared to the five-year average of 19.2 times. The PE ratio of Nifty Midcap 100 and Nifty Smallcap 100 indices stood at 33.6x and 21.5x compared to the five-year average of 24.4x and 17.2x, respectively.
Edelweiss BAF, which follows a pro-cyclical asset allocation model as opposed to the more common countercyclical approach, had a net equity exposure of 69 per cent at the end of last month. The cash levels at equity schemes also went up sharply last month. Equity schemes of the top 26 fund houses were sitting on nearly Rs 80,000 crore cash at the end of July 2024, up 27 per cent from the June-end tally of Rs 62,700 crore, according to a Motilal Oswal report.
As a result, the aggregate proportion of cash in these schemes rose to a 15-month high of 5.4 per cent. In June, cash accounted for 4.6 per cent of the portfolios.
Experts and mutual fund officials have been recommending hybrid funds, especially for lump sum allocations, as equity valuations are elevated.
However, the inflows remain concentrated in the active equity offerings. The inflows that are coming into the hybrid space have been going largely into multi-asset funds (MAFs). In the past 15 of the 16 months, MAFs have eclipsed BAFs in terms of net inflows amid a slew of new product launches.
First Published: Aug 21 2024 | 7:44 PM IST
