Dynamic Asset Allocation Funds (DAAF) also termed as Balanced Advantage Funds (BAF) are basically hybrid funds that invest in both equity and debt components. However, unlike other hybrid funds which are mandated to maintain a minimum and maximum allocations  to Debt and Equity portions, DAAFs are highly flexible and allow the funds to invest upto 0-100% of their assets in Debt or Equity securities based on market conditions.

Generally when equity markets are at peaks or highs in terms of pre defined criteria like say Nifty PE the fund allocations are moved from equities to debt, to protect the gains and also generate a steady stream of fixed income. Other way round when the markets are at a bottom the equity component is raised to take advantage of the lower valuations.

Past returns and AUM

Some of the major schemes in terms of AUM in this category are HDFC BAF followed by ICICI Pru BAF and SBI BAF. These 3 account for roughly 65% of the overall category AUM. Presently ie as of Nov/Dec 2023 major schemes have maintained roughly 60-65% in equites (excluding hedged portion) and 25% in Fixed Income with balance in Hedged equity positions, REITs / InvITs and Cash. Considering that 2023 has been exceptionally good for equity markets, we chose to analyze 3 year returns for comparative purposes. Average 3 yr CAGR returns stood at roughly 12.5% to 13.5% which is quite good considering equity exposure of these funds is typically only around 65% at most times although theoretically these can invest fully in equities as well.

In the past when the markets were at lows equity exposure of these funds tends to be higher which is the underlying objective of such category of funds.  For example HDFC BAF had an equity exposure of 83% as of April 2020 (60% Core equity exposure as of Dec 2023 excluding hedged positions).

Vintage

Considering that the Equity and Debt mix is completely left to the discretion of the Fund manager, the track record of the Fund manager and the scheme is quite critical deciding factor. HDFC BAF, ICICI BAF and Nippon and Aditya Birla all fare well in terms of the vintage part. HDFC BAF stands out in terms of past performance and outperformed its peers by a very wide margin. The major reason for outperformance can be attributed to large exposure to PSU stocks which have been star performers in past 12-24 months.

Conclusion

As the objective of these category of funds is to balance the risks in down cycles and capture the upcycle through its limited equity exposure, these schemes can be a good option for investors presently considering the markets are trading at all time highs on the back of 4 years of bull run.