For those looking at a hybrid fund that aims to benefit across market conditions by dynamically managing equity and debt allocation, the Quant Dynamic Asset Allocation Fund (DAAF) would be a new entrant in an overcrowded category.
The existing balanced advantage fund (BAF)/dynamic asset allocation fund (DAAF) category has 28 schemes and is quite popular among risk-averse investors who want equity exposure but have low risk appetite for the accompanying volatility. Let us find more details about the product.
Primary objective, strategy
Quant Dynamic Asset Allocation Fund aims to provide capital appreciation by investing in equity and equity-related instruments including derivatives and debt and money market instruments. Such funds are suitable for indicative investment horizons of three years and more.
Notably, the fund has had to modify its investment strategy to right-fit its taxation status in the backdrop of the amendments to Finance Bill, 2023 that impacts debt funds.
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The benefit of indexation on long term capital gains on debt mutual funds is withdrawn for investments made on or after April 1, 2023. So now, debt mutual fund schemes will be taxed at income tax rates applicable to an individual.
This change compelled Quant Dynamic Asset Allocation Fund to tweak the strategy from a taxation perspective. So, now the fund aims to modify its taxation from debt to equity due to the said amendments to the Finance Bill, 2023. To avail of equity taxation, a minimum of 65 per cent equity exposure will be maintained in the scheme.
The unique feature of the scheme stems from its mandate to dynamically rebalance equity exposure (0 to 100 per cent) and debt exposure (0 to 35 per cent), in line with its view on Risk-On or Risk-Off environment. Quant money managers have full flexibility and can even hedge up to 100 per cent equity exposure by using derivative instruments in extreme risk-off environment.
Like any other dynamic asset allocation, Quant DAAF will aim to capture the upside in the bull phase and limit the downside in the bear phase. This jugglery, when done correctly, can reduce the volatility of the overall portfolio.
The fund-house uses Valuation, Liquidity, Risk Appetite and Time (VLRT) framework for investments.
- Valuation: Knowing the difference between price and value.
- Liquidity: Understanding the flow of money across asset classes.
- Risk Appetite: Perceiving what drives market participants to certain actions and reactions.
- Time: Being aware of the cycles that govern how the other three dimensions interact.
Quant DAAF will dynamically readjust asset allocation on the basis of “VLRT + Q2” (VLRT with Quantifiable Quality).
The scheme is unconstrained i.e., no market cap bias (equity) or maturity bias (debt). Equity exposure will be dynamically managed and increased when various factors are favourable towards equity as an asset class or brought down when the factors are not favourable.
Since September 2019, fund managers have been using a dynamic style of money management, adapting the investment strategy based on the current market environment. They also use market timing indicators as a risk mitigation strategy.
This approach to investing ensures diversification and safeguarding of investor wealth by studying and investing in multiple asset classes, including equity and debt. This has, arguably, helped quant funds to climb up return charts.
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Fund basics
- Benchmark Index: CRISIL Hybrid 50+50 Moderate Index.
- Plans available — Growth Option: Direct & Regular & — Income Distribution cum Capital Withdrawal Option (Payout & Re-investment facility) — Direct & Regular.
- Exit load: Nil.
- Fund managers: Sandeep Tandon, Ankit Pande, Sanjeev Sharma and Vasav Sahgal.
How has the category performed
Most balanced advantage funds juggle around with equity, debt and derivatives. They follow different models, but the overarching aim is to shield assets from sharp drawdowns that the equity market, time to time, is subjected to.
The debt allocation’s purpose is to cushion the overall portfolio and so typically not much risk is taken there (sticking to AAA-rated securities).
Below is a table on how existing dynamic asset allocation/balanced advantage funds have performed over different time periods. These funds have a minimum 3-year NAV history (as on March 31, 2023).
Here is a look at the BAF/DAAF category in terms of the top-10 funds with highest investor assets.
These include HDFC Balanced Advantage Fund, ICICI Prudential Balanced Advantage Fund, Nippon India Balanced Advantage Fund, Invesco India Dynamic Equity Fund and Edelweiss Balanced Advantage Fund.
Our take
All BAF/DAAF offers have some common threads given the same mandate; but there are personalised tweaks done to differentiate themselves.
- One, they use a model or set of valuation indicators to assess the attractiveness of the stock market.
- Two, they fix the extent of hedging through stock and index futures. High unhedged equity exposure makes funds more prone to market swings and leads to poor downside containment abilities during corrections.
- Three, on the debt side, some BAF/DAAF offerings take credit risk and have historically held lower-rated papers, primarily in the AA and AA-buckets.
‘Capturing upside, and limiting downside’ is the dream of investors. But because dynamic asset allocation is easily said than done, it is important for investors to assess results before diving in. Investors can play wait and watch for performance evidence in quant Dynamic Asset Allocation Fund.