Equity markets have been very volatile for the past 6 months. As such many financial advisors are recommending balanced funds to their clients. Balanced funds are excellent investment option for investors with moderate risk tolerance, since they can generate excellent returns for the investors with limited downside risks. The other major advantage of balanced funds is the capital gains taxation. Balanced funds with equity allocation of 65% or more are treated like equity funds from a tax perspective. Dividends and long terms capital gains are tax free for such funds. While there are fairly large number of schemes in the balanced fund category the ICICI Prudential Balanced Advantage fund is an ideal investment option for investors with moderate risk appetite, since the risk profile of the fund is on the conservative side relative to most of the other schemes in the balanced fund category. The fund’s equity allocation ranges between 30 – 80% based on dynamic asset allocation strategy determined by Price / Book ratio of the equity market. Currently the equity allocation of the fund is 65%. The fund’s risk adjusted performance has been very strong over the past few years. The AUM of the fund has grown over 200% in the past one year.
Despite its conservative risk profile relative to the balanced funds category the ICICI Prudential Balanced Advantage has outperformed the categories in terms of trailing returns across most time periods.
If we look at annual returns of the ICICI Prudential Balanced Advantage Fund over the last 5 years, what stands out is the relative outperformance of the fund, in the years that were generally challenging for equity markets.
One of the best measures of the fund performance consistency is rolling returns relative to its benchmark.
We have chosen 3 years as the rolling returns time period because it is always recommended that long term investors should hold equity oriented funds for at least 3 years. The chart below shows the 3 year rolling returns of the ICICI Prudential Balanced Advantage Fund relative to the benchmark CRISIL Balanced Fund Index. We can see that the fund beaten the CRISIL Balanced Fund Index 100% of the times since 2010.
From the middle of 2011 onwards, the three year rolling returns of this fund has been consistently above 15%.
Other Performance Measures
The table below details the performance the ICICI Prudential Balanced Advantage Fund versus Balanced Fund category on several other important performance parameters, like Volatility, Sharpe Ratio and Alpha. While Sharpe Ratio measures the performance of a fund relative to the risk taken by it, Alpha is the excess returns over the benchmark on a risk adjusted basis. We have explained the concepts of Volatility, Sharpe Ratio and Alpha in our article, This Mutual Fund or That Mutual Fund: An Investors Fix
We can see that the fund has outperformed the category on the 3 performance parameters.
In terms of portfolio construction, equity comprises 65% of the portfolio mix while fixed income securities and cash equivalents comprise the rest. The portfolio has a large cap bias, which further moderates the risk profile of the fund. The quality of the debt portfolio is quite high with moderate interest rate sensitivity.
Dividend Payout Track Record
ICICI Prudential Balanced Advantage Fund has an excellent dividend payout track record over the past few years. The monthly dividend option of the fund has been paying regular dividends since May 2013. The dividend yield is also quite good. The table below shows the monthly dividends of a
र 1 lac investment in the fund made in April 1, 2013.
We can see from the above table that an investment of
र 1 lac in the monthly dividend option of the ICICI Prudential Balanced Advantage fund made on April 1, 2013 would have yielded a total tax free dividend of over र 18,500 and tax exempt capital gains of over र 65,000 in around two and a half years.
Money Back Option
From 10th September 2015 ICICI Prudential Balanced Advantage Fund introduced a new option called the Money Back option. In this option investors can get a fixed monthly cash flow by withdrawing a fixed amount from the scheme depending on prevailing NAV’s of the options selected by the investor. It is the first mutual scheme to have an option like this. Investors should understand that the money back feature does not imply assured returns from the scheme. Investors should also note that all withdrawals from the scheme within 1 year of investment will be subject to short term capital gains tax.
The chart below shows returns of
र 3,000 monthly SIP started in ICICI Prudential Balanced Advantage Fund, Growth Option, since inception. The SIP date has been assumed to be the first working day of the month. By investing र 3,000 monthly, the investor would have accumulated over र 590,000 with a cumulative investment of र 315,000 only.
While the returns of ICICI Prudential Balanced Advantage is slightly on the lower side relative to its more aggressive peers in the category, the stability of returns and outstanding tax free dividend track record makes this fund an ideal investment choice for investors with moderate risk appetite. Investors should consult with their financial advisors if this fund is suitable for their investment objectives.