Balanced Advantage Funds – Hybrid Mutual Funds Segment 1

Summary

Balanced Advantage Funds works on the principle of Dynamic Asset Allocation i.e. they actively manage and invest in the blend of equity and debt based on the market movements.

There are there things an investor has in mind when he thinks of investment plans, the risk factor and his ability to face the risks at that particular age, the returns he will receive whether it is long-term or short term in accordance with the plans, and the options chosen to invest in his portfolio are they good enough? It is pretty human that our investment decisions are often guided by our emotional situations and instincts which is not a quantified approach and can harm our financial interests. Fear can lead to sub-optimal returns and greed can make you take unnecessary risks.

During the Pandemic, the investors’ approach started shifting, remember last year when the Sensex hit 50,000 points? Investing in Equity prices was at an all-time high, it also increased the valuations, and the safety margin was reduced. Now, where did the investors switch?

Let’s see the new investment option that has taken the market by storm is the hybrid mutual funds, in this segment, we will try to get to know one of the hybrid mutual funds which are the “Balanced Advantage Funds”.

What do we mean by Balanced Advantage Funds?

Balanced Advantage Funds is a type of Hybrid mutual fund, also called Dynamic Asset Allocation funds, it changes its assets allocation which is Equity and debt dynamically according to the market conditions thereby reducing the risk in the investment portfolio.

Understanding the Working of Balanced Advantage Funds

Balanced Advantage Funds would reduce the equity and increase the Fixed income allocations when equity is valued higher. Alternatively when equity is valued low then the Fixed income will decrease and equity allocations are higher. This approach is called the Dynamic Asset Allocation funds they try and reduce the risks in investing.

Asset Allocations to Diversify Your Investment

There are different asset classes from equity, Fixed income, and debts, money markets or real estate each have its own risk profile. Now asset allocation tries to reduce the volatility of the profile to these risks, helping to maintain a healthy investment profile by balancing the risk and the returns.  It will make you more tax efficient and add more liquidity to the profile. We now know that Balanced Advantage Funds follow the Dynamic asset allocation model, they actively manage and invest in the blend of equity and debt based on the market movements.

They increase or decrease their allocation to different asset classes, mainly Equity and debt depending upon the stock market changes, making them more dynamic in managing and reducing the risks and generating risk-adjusted returns. If we reduce the equity asset allocation

when the markets are high and increase when the markets are low, you draw down your profile and make profits from adjusted risk returns by buying low and selling high.

While numerous mutual fund categories might assist you in gaining exposure to various asset classes or subclasses, balanced advantage funds are possibly the only category of mutual funds that dynamically manages asset allocation in response to market conditions.

Right Reasons to Invest in Balanced Advantage Funds

During high market conditions, investors are unsure whether to stay invested in equities anticipating gains but when you opt for Balanced Advantage Funds, you don’t need to be concerned about the timing of investment in equity or debt.

There are tax repercussions when you try to redeem your investments to rebalance the share of Equity and debt. But BAF does it happens in tax efficient manner as asset allocation is a part of the strategy.

They provide better protection compared to pure equity funds if there is a severe market crash they achieve this by reducing exposure to equities and at the same time increasing exposure to debt.

Things to Remember While Investing in Balanced Advantage Funds

• Different Balanced Advantage Funds have their strategies and the asset allocation mix with in-house mathematical models by fund managers. While some stick to a conservative approach and involve in the Hedging technique while some navigate more to an aggressive approach.
• It is essential to know that it is for an investment horizon of at least 3 to 5 years making this a good option for moderate to high-risk profile investors. Remember this doesn’t provide a fixed monthly income as annuities as promoted in the market.
• Some companies offer complete flexibility while allocation and also withdrawal facilities can be fixed percentage of the cost of the investment or a specific amount.
• Check out for some quantitative parameters when selecting a Balanced Advantage Fund, such as consistency of the fund in performing across all phases of the market when high and low, use evaluating ratios, if it is well diversified across market segments and follows last but not the least follow the performance of the fund.

Conclusion

Risk and Returns are always co-related and investor has to know that Balanced Advantage Funds doesn’t come without risks but are comparatively less than pure equity funds. If you don’t like high risks then this can be an ideal choice. The investors gain from the expert guidance of a fund manager as they closely study the microeconomic traits that affect the market and are actively managed in a better way.

Let’s talk more in the upcoming segments on Hybrid Mutual funds in the coming weeks.

 

Do Read on Mutual funds and ULIPs:  How ULIPs Scores Over Mutual Funds