ICICI Prudential Balanced Advantage Fund: Fund Review

ICICI Prudential Balanced Advantage Fund is a Hybrid mutual fund belonging to the Balanced Advantage Fund / Dynamic Asset Allocation category. ICICI Balanced Advantage Fund is one of the largest mutual funds in India with Assets Under Management or an AUM of ₹25,663 crores. Also known as ICICI BAF, the fund invests in a mix of stocks and bonds. ICICI Balanced Advantage Fund has given 11.2% p.a. returns since its launch in December 2006. The fund is managed by ICICI Prudential CIO S. Naren along with Rajat Chandak, Manish Banthia, and Ihab Dalwai.

According to SEBI guidelines, Balanced Advantage or Dynamic Asset Allocation Funds are hybrid funds where the investment in equity and debt is managed dynamically. ICICI Balanced Advantage Fund uses the price-to-book value ratio or P/B ratio of the market to decide its equity allocation. The net equity exposure of the fund can range from 30% to 80% with debt making up the rest. The fund invests in equity arbitrage opportunities to ensure that the total equity investment is higher than 65%. This makes ICICI BAF eligible for equity funds taxation. ICICI BAF is suitable for investors with moderate risk appetites who are seeking a monthly income or long-term capital appreciation.

We analyse the investment strategy of ICICI Prudential Balanced Advantage Fund (BAF) in detail and review its performance below.

1. Buy Low and Sell High

ICICI Balanced Advantage Fund uses price to book value (P/BV) measure to decide its allocation strategy. It changes its allocation to equities and debt depending on the P/BV ratio of the NIFTY. An increasing P/BV indicates that the market is getting expensive. In such conditions, the fund reduces its net allocation to equities. In September 2013, the fund allocated 77% to equity corresponding to a P/BV ratio of 2.71. When markets turned expensive at a P/B of 3.76 in January 2015, the allocation to equities fell to 34.30%. The net allocation to equity went back to 76% when the P/B of NIFTY fell to 2.81. When markets went up high in October 2017, the fund again trimmed its net equity exposure to 37%. Such an investment model diminishes the impact of human emotions like fear and greed on investing.

2. Adapts to All Conditions

2.1 Flat Market

ICICI BAF has performed in every market condition. Let’s take an example, The Sensex was at 16,022 on 25 March 2010. After two years, on 5 June 2012, the Sensex was still at 16,021. Even in these flat market conditions, ICICI BAF managed to deliver an absolute return of 19% and a compounded annual return of 8.75% p.a. There are many such examples where the market remained flat and the fund managed positive returns consistently.

2.2 Bull Market

From March 31 2014 to March 31 2015, the Sensex rose from 22,386 to 27,957, thus offering a one-year return of 24%. Over this period, the fund had an average allocation in equity of around 47%. Even with this relatively low allocation, the fund managed to deliver returns of 27%, thus outperforming the market. What is notable here is that despite taking a low level of risk, as signified by the low equity allocation, it managed to outperform the Sensex. This translates into a superior risk-adjusted return for the investors.

2.3 Bear Market

Between 3 February 2015 and 30 October 2015, the markets fell with the Sensex giving a return of -8.1%. In this falling market scenario, not only did the fund succeed in declining less than the Sensex, it also managed to turn in a positive return of 4.4%.

2.4 Over a Market Cycle

During the market cycle between 26 May 2014 and 30 October 2015, which included both a bull and a bear phase, the Sensex delivered a CAGR of 5.4%. Over this period, the fund was miles ahead with a CAGR of 15.2%.

3. ICICI Prudential Balanced Advantage Fund Outperforms Bank FDs

The fund has comfortably beat returns from FDs over all four investment horizons that we considered. The fund has given returns of 14.0% p.a. in the last 5 years and 9.7% in the last 4 years. In the last 1 year, the fund gave returns of 8.55% beating FD by a big margin. Bank FD returns are in the 6-7% range in the same time periods. If you look at post-tax returns, then the outperformance of ICICI BAF over FD is higher. ICICI BAF benefits from equity taxation at 10% after 1 year compared to a 30% tax deduction in FD in the highest income tax slab.

4. A 3-in-1 investment

ICICI BAF can be considered as an amalgamation of 3 types of funds. When market valuations are high, the equity allocation falls to 30%. In such a case, the fund becomes a Conservative Hybrid Fund popularly known as a monthly income plan or MIP. When the market becomes fairly valued, the fund raises its allocation to equities to 50% similar to a balanced hybrid fund. When market valuations are attractive, the fund raises its equity allocation to 80% resembling aggressive hybrid funds. Thus, ICICI BAF can be seen as a 3-in-1 product. Since the fund adjusts its portfolio based on market valuations, the investors need not worry about market fluctuations. Asset under Management or AUM of this fund has grown a massive 120 times from ₹204 crores in March 2013 to ₹25,600 crore in April 2018.

Conclusion

As seen above, ICICI Balanced Advantage Fund can perform well in all market conditions. Through its dynamic investment model, ICICI BAF tries to solve the problem of market timing for investors. These factors make ICICI BAF a good fund for investors with low to moderate risk appetite. Due to its moderate equity exposure, ICICI Balanced Advantage Fund also comes across as a good replacement to bank FD.