“The fund is run in a countercyclical manner, paring down equity when markets rise and increasing it when markets fall. In line with the model and the prevailing high equity market valuations, the net equity levels of the fund have been reduced,” said Sankaran Naren, CEO, ICICI Prudential Mutual Fund.
Balanced advantage funds invest in a mix of debt and equity, based on market valuations. Such schemes lower allocation to equities when market valuations appear expensive and vice versa. The net equity component in the scheme can vary between 30% and 80%, with the balance being invested in a mix of arbitrage and debt, with total equity allocation above 65%, thereby giving it equity taxation. Fund managers decide equity valuations based on the trailing price-to-earnings (PE) ratio of Nifty 50 or S&P BSE 100 and use other ratios like price-to-book and dividend yield to decide equity allocation.
The scheme had an equity allocation of 41.4% in March, which was brought down to 37.4% in June.
The lowest equity allocation in ICICI Prudential Balanced Advantage Fund’s history since its launch in March 2010 was 30.13% in August 2018.
ICICI Pru Cuts Fund’s Equity Allocation
It held an average equity of 43.4% in the past five years. It had increased its equity allocation to 74% in March 2020, when stocks corrected sharply at the start of the Covid-19 pandemic.However, in 2023, as equities soared and valuations turned expensive, the average equity allocation came down to 41.6%.In the past one year, the fund has given 21.95% returns and 14.08% in the past three years.
The Nifty 50’s PE ratio has increased to 22.03 times from 17.15 times on March 23, 2020. During this period, the price to book value has surged to 4.04 times from 2.17 times.
“The scheme has a long track record of consistently following this model of reducing equity when valuations turn rich and vice versa. This strategy has worked well for investors with a moderate risk appetite,” said Amol Joshi, founder, Plan Rupee.
Naren said he believes such schemes aim to benefit from market volatility and hence he recommends investors to put lumpsum money in such funds and other hybrid strategies in the current market scenario.