The corpus of a BAF is allocated dynamically between equity and debt securities, based on certain pre-determined market valuation and analysis tools. Some AMCs use the Price to Earnings (P/E) Ratio while others use the Price to Book (P/B) Ratio as their base for determining the asset allocation mix. Then there are some that use a kind of hybrid model, incorporating both, boosted further by trend analysis.
For the sake of easier comprehension, let us assume that a BAF starts off by investing 33% in pure equity and 33% in arbitrage to keep gross equity investments at or above 65% while investing the rest in debt securities. Their long-term gains thus attract Equity taxation of 10% as against Debt taxation of 20% (with indexation).
However, like any other Dynamic Asset Allocation Fund, BAFs too have the flexibility to dynamically shift the corpus from equity to debt and vice-versa. The underlying theme though is to seek capital appreciation, while guarding against volatility.
To put matters in perspective, it is worth noting that the average fall in returns in the BAF category has usually been around half of that of the large, medium and small-cap categories of funds whenever the markets have slipped in recent times.
Mind you, this is what the data shows, but by no means is any guarantee of how similarly they will fare going ahead. In the next column, we shall proceed to take a closer look at some of the BAFs on offer, their current asset allocations and performance track records.
Ashok Kumar
Head of LKW-India. He can be reached at ceolotus@hotmail.com
(Views expressed here are personal)
