To Invest Or Redeem?

I have invested in ICICI Prudential Balanced Advantage Fund. My exit load period will soon expire. Should I continue to invest in this fund or redeem it?

ICICI Prudential Balanced Advantage Fund is one of the best performing multi-cap funds. The fund follows a dynamic asset allocation strategy and uses an in-house model to determine the allocation to equity. This model is based on the historical mean price to book value (P/BV) of the Nifty. At higher P/BV levels, the fund reduces its equity exposure to minimize downside risk as a higher P/BV generally means the index is trading at expensive valuations. Conversely, when the market’s P/BV is relatively low, the fund increases its allocation to equities.

The fund also uses derivatives for hedging or portfolio rebalancing. The fund invests in a blend of large and mid-cap stocks the allocation is decided on a tactical basis. In December, the fund had invested nearly 40 per cent of its corpus in debt, money market instruments and cash and current assets. The remainder was invested in equities.

You should definitely hold onto this fund, especially in the current scenario. The near-term outlook for Indian equities is uncertain because of the upcoming elections. Equity markets are likely to be range bound in the short-term as the recent rally was probably driven by hopes of a BJP victory in the elections and by liquidity rather than fundamentals. Furthermore, a sustainable rally is contingent on earnings upgrades which are not yet imminent in most sectors. The market is currently being propelled by the expectations of a NDA-led government. A negative surprise such as a Third Front government may lead to a significant correction.

ICICI Prudential Balanced Advantage Fund has a relatively conservative approach which has helped it restrict losses in the past. The fund generally outperforms the index in falling or volatile markets. An example of this phenomenon is shown in the chart below. The Nifty crossed 6,300 for the first time in November 2010 but subsequently fell by nearly 30 per cent between November 2010 and December 2011. During this period, ICICI Pru Balanced Advantage Fund fell by only 11 per cent.

The fund’s conservative nature also means that it may occasionally underperform its peer group in a rising market. However, over the long run, the fund is likely to generate high returns, even in bull markets. For instance, since the last December 2011, the Nifty rose by 40 per cent and notched a new all-time high on 9thDecember 2013. As shown in the chart, ICICI Pru Equity Balanced Advantage Fund outperformed the index and generated a return of 48 per cent during this period.

The table below shows that the fund has generated higher long-run returns than the Nifty. Shown in the table is that the fund has generated double-digit returns over the last three years, while the Nifty generated a return of less than 5 per cent over the same period.

In conclusion, you should continue to invest in ICICI Prudential Balanced Advantage Fund. The fund’s rebalancing strategy will help it add value to your portfolio especially in the current scenario as the near-term outlook for equities is uncertain. Investments in conservative funds such as ICICI Prudential Balanced Advantage Fund can help limit the impact of negative shocks on your portfolio.