When market prices are not cheap and key indexes are trading at all-time highs, a Balanced Advantage Fund might be a good choice. These funds assist investors in getting the most out of a market cycle by limiting the negative risk when markets fall. BAFs may be worth investing in for existing equity mutual fund scheme investors or new investors concerned about the present market levels but do not want to miss out on any further stock rise.
Balanced Advantage Funds actively adjust asset allocation between debt and equity based on market conditions, a traditional risk reduction, and a volatility-controlling investment technique. It’s difficult for ordinary investors to keep track of their portfolio and rebalance it.
BAFs have succeeded in their promise of minimising the downside while capturing the upside in the long run, with many falling less than the broader markets while also providing comparable returns.
How do Balanced Advantage Funds work?
A built-in rebalancing strategy allows balanced advantage funds to substantially reduce or increase their asset allocation to equities or debt. When stock markets are rising, investors rush to buy equities since they are the most profitable. Investors seek out safer havens and fixed-income assets when markets are volatile. Here are some crucial points to remember when learning about these funds:
- Most balanced advantage funds invest 65-80% of their assets in equities, depending on the fund house’s in-house strategy.
- They may also raise their shares investments when key indexes rise, and valuations are expected to climb. When fund managers anticipate a market catastrophe, they may sell stocks and swap to debt instruments to protect you from large losses.
- Dynamic asset allocation funds are so titled because they can dynamically allocate and reallocate fund resources. They provide the benefit of high returns through equities and arbitrage investments and the security of set returns to protect against market dangers. As the market matures, they provide a better mix of returns that can outperform inflation over time by minimising the downside of equity markets.
Features of Balanced Advantage Funds
Markets are volatile, and Balanced Advantage Funds (BAFs) utilize this volatility by employing an effective strategy. Debt provides a consistent income, while equity provides market-linked gains. Long-term, investors must be willing to incur risks to profit from equities while pursuing a steady income. Because of the following characteristics, dynamic asset allocation funds are a suitable alternative for effective wealth creation planning:
Stability of Returns
In Balanced Advantage Funds, fund houses utilize investment models to determine how much stock to hold under their portfolios in various market scenarios. These models are based on multiple stock valuation metrics, such as price-to-earnings (P/E), price-to-book (P/B), and so on. The model dictates whether to increase or decrease the equity percentage based on how “cheap” or “expensive” stock markets are.
Such models aid in reducing the discretion of fund managers when it comes to market timing. These funds are stable since they can move in and out of equities based on market conditions.
Markets do not move in a straight line up or down. Volatility, quantified by standard deviation, is the daily rise and fall.
A Balanced Advantage Fund is not constrained by the rules of a pure balanced fund, that must invest 65-70 percent of its invest in mutual funds and the rest in bonds. BAFs can dynamically modify their asset allocation based on daily equity valuation.
BAFs can allocate up to 80% of their assets to equity and just 30% to debt, allowing them to significantly cut or grow their debt and equity exposure depending on the market conditions. This allows the BAF category to provide a stronger long-term mix of returns, beating inflation and yielding a far higher return than a typical debt or balanced fund.
The funds might be taxed as debt or equity funds based on their asset allocation. On the other hand, most funds keep their equity exposure through equity derivatives to take advantage of the equity tax treatment. They also employ hedging techniques or arbitrage opportunities to mitigate risk when overvalued equities keep their equity allocation intact.
As a result, it can be argued that balanced advantage funds provide investment corpus stability and alpha, both of which are critical for retirement.
As a result, one should invest in Balanced Advantage Funds, which attempt to produce long-term returns similar to equity funds due to their lower volatility. Through investment in fixed income instruments, it tries to provide stability and regular income. It has a higher tax efficiency than asset allocation done by an individual investor. It is a set of well-defined and time-tested models free of biases. Finally, it’s a mix of future capital growth, capital preservation, and volatility management.