Navigating Market Turbulence with Balanced Advantage Funds

Navigating Market Turbulence with Balanced Advantage Funds

By Akhil Chugh

Date October 29, 2023

In the world of investing, volatility is a constant companion. Market fluctuations, economic uncertainty, and geopolitical events can all lead to rollercoaster rides for investors. While these ups and downs are a part of the investment journey, many investors seek ways to mitigate the impact of volatility on their portfolios. One such approach is to invest in Balanced Advantage Funds.

Beating volatility wit Balanced Advantage Funds

Balanced Advantage Funds, also known as Dynamic Asset Allocation Funds, are a category of mutual funds that aim to offer investors a smoother ride through market volatility by actively managing their asset allocation. These funds are designed to strike a balance between equity and debt instruments, adjusting the allocation based on market conditions, economic indicators, and other factors. Here’s how they work and why they can be a valuable tool for investors looking to beat volatility.

Balanced Advantage Funds – The Basics

Balanced Advantage Funds primarily invest in a combination of equity and debt instruments. The key feature that sets them apart from other mutual fund categories is their dynamic asset allocation strategy. Unlike traditional equity funds, which maintain a fixed equity exposure, or pure debt funds, which primarily invest in fixed-income instruments, Balanced Advantage Funds have the flexibility to adjust their asset allocation to exploit market opportunities and reduce downside risks.

This active asset allocation strategy is based on a set of predetermined parameters and rules. When equity markets are perceived to be overvalued or overbought, these funds tend to reduce their equity exposure and increase allocation to debt instruments, such as government securities and corporate bonds. Conversely, when equity markets appear to be undervalued, they increase their equity allocation.

Beating volatility with Balanced Advantage Funds

Why 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 to BAFs, especially in volatile markets:

1. Beat Volatility:

Volatility is the essence of the market. There are many factors that trigger volatility such as RBI policy, government policy reforms, global macroeconomic developments, geopolitical events, etc. Many a time, volatility triggers psychological pressure on investors and compels them to take uninformed actions.

Investors tend to lose money in such times. This is the premise on which the balanced advantage strategy has been built. These funds follow an investment style that involves diversifying the exposure into more than one asset class and judiciously adjusting asset allocation. They aim to reduce the impact of market volatility on the portfolio. These funds may help remove psychological barriers of greed and fear from investors.

Beating volatility wit Balanced Advantage Funds

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 interest coupon and price fluctuations, which further contribute to the fund’s performance.

2. 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.

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 can perform well even in flat markets. Besides, after considering the investor’s risk profile, the scheme can be blended with large funds and debt funds for further diversification. 

4. No exit load:

There are no exit loads for shifting from one asset class to another within the scheme. There are several options available to the investor when it comes to investing in these funds.

When to invest in Balanced Advantage Funds?

Beating volatility with 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.

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 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 volatile markets, 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 volatility of the market, 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.                         

For more information, get in touch with us today!

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Happy investing!