Is it the right time to invest in Balanced Advantage Funds?
By Akhil Chugh
Date August 7, 2021
Balanced Advantage Funds are a type of hybrid mutual fund investing in more than one asset class (e.g., equity, fixed income securities, etc). Balanced Advantage Funds are also called Dynamic Asset Allocation Funds as BAFs manage their exposure to equity, arbitrage & debt instruments based on a pre-defined investment model where exposure to different asset classes is defined based on market valuation parameters like price to earnings ratios, price to book value, etc. Equity Allocation ranges from 20% – 80% based on market valuations. The category was created based on new norms from the Securities and Exchange Board of India (SEBI) and is free of any minimum exposure limits or caps from the same.
While equity investments provide market-linked returns, debt instruments offer fixed returns. Since the fund has flexibility to shift allocation between the asset classes based on pre-defined investment model depending on market valuations, when the markets rise, the funds move to debt instruments. Meanwhile, if the stock declines, debt securities ensure a steady income.
The dynamic nature of these funds is attributable to pre-defined in-house models based on which the fund house makes allocations across different instruments. Furthermore, these funds maintain market exposure to equity derivatives to leverage equity tax treatment and hedging when stocks are overvalued.
Why to invest in Balanced Advantage Funds?
Balanced Advantage Fund gives investors the freedom from managing equity and debt allocation manually during market ups and downs, ensuring balanced growth. Let’s look at some of the reasons why Net Brokers suggest its investors take exposure in BAFs:
1. Equity Growth:
Balanced Advantage Funds usually manage an equity allocation between 20% and 80% as per the market valuations. In doing so, Balanced Advantage Funds invest predominantly in stocks and other equity-related instruments to gain appreciation in the equity market. This leads to greater wealth generation, and investment in equities also allows investors to earn inflation-beating returns.
2. Stability:
When equity valuation is high, fund managers based on a pre-defined in-house investment model reduce exposure to equity and increases exposure to debt. Exposure to debt acts as a cushion in volatile equity markets. Depending upon the investment model of each fund, the fund can tactically take duration and credit calls to benefit from higher YTM and price fluctuations, which further contribute to the fund’s performance.
3. Diversification:
Since this is an open-ended fund for income distributions and capital gains, the dynamic rearrangement of assets between fixed income and equity allows you to diversify your portfolio. Using arbitrage opportunities and equity derivatives strategies, pure equity investments can be made, and debt securities can be simultaneously managed.
By offering a mix of debt, arbitrage, and equity, the product is best suited for retirement planning and can perform well even in flat markets. Besides, after considering your risk profile, the scheme can be blended with large-funds and debt funds for further diversification.
Who should invest in Balanced Advantage Funds?
Ideally, a BAFs investor should be someone looking to create long-term wealth via lower volatility or seeking exposure to both debt and equity asset classes through dynamic asset allocation.
Individuals who are new to mutual fund investments can also allocate funds to BAFs if they want to seek exposure to the equity market while keeping the risk on the low end. Those wanting to dip toes in the equity markets following a conservative approach can also benefit from investing in BAFs.
When to invest in Balanced Advantage Funds?
Balanced Advantage Funds are known as– the “all-season” funds! However, while they remain unharmed by market volatility, you should only invest in BAFs if you are ready to stay invested for a long investment horizon.
Remember, that the timing of your investment determines 90% of the returns. If BAFs take the wheel, they can automatically perform asset allocation and allow you to enjoy lucrative returns in the long run.
Past Performance of Top Balanced Advantage Funds
Based on our analysis and research at Net Brokers, the schemes mentioned below are currently the best schemes in the Balanced Advantage Fund category. These funds fare well on quantitative and qualitative parameters and have the potential to deliver superior growth in the long run.
Key Takeaways from Net Brokers:
- If you are a new investor unwilling to withstand present-day market volatility, Balanced Advantage Funds are ideal for you. These asset allocation funds can serve as risk-adjusted solutions.
- Balanced Advantage Funds are also the best category of mutual funds for passive investors who often do not want to rebalance their funds.
- Net Brokers always suggest its investors to understand which asset allocation model a particular Balanced Advantage Fund is following. You should read the scheme information document (SID) to know how the dynamic asset allocation will work for the particular scheme.
- In current times of uncertainty, investors can opt for lumpsum investment in Balanced Advantage Funds to earn good returns in the long run.
- Invest in Balanced Advantage Fund with an investment horizon of at least 5 years to earn the desired returns from your mutual fund investments.
Currently, given the unpredictability of the pandemic, Balanced Advantage Funds (BAFs) are one of the best investment solutions for dynamically navigating the equity market and reducing the impact of any market volatility to ensure investors a smooth ride with handsome returns.
Consult the Net Brokers team if you need any help in knowing the risk characteristics of a scheme or your own risk profile. You should always make informed investment decisions based on your risk appetite and investment needs.
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