What are balanced advantage funds?
Balanced advantage funds are also known as dynamic asset allocation funds and are a type of hybrid mutual fund. Mutual funds invest in a basket of securities, typically equity and debt, to meet different investor goals. Equity funds have a minimum of 65% of the funds invested in stocks and other equity-linked instruments. Similarly, debt funds allocate the majority of their funds to fixed-income securities such as government securities, bonds, etc. Both have their own benefits as the nature of their underlying securities and their risk-return profile differ and hybrid funds invest in both equity and debt securities to maximise the benefits of each.
Balanced advantage funds benefits are unique and investors in the country have been realising this lately given the volatile market. As of September 2021, balanced advantage funds, at a size of Rs. 1.43 trillion, have become the largest category of hybrid mutual funds. The essence of the advantages of balanced advantage funds is that they aim to move between equity and debt securities in a strategic manner to capitalise on the upside of a volatile market and limit its downside. Let’s understand how balanced advantage funds benefit investors in a volatile market.
Balanced advantage funds and market volatility
Asset allocation, depending on the market conditions, can be more advantageous in equity securities or debt securities. But market conditions change quickly and it may be difficult for investors like Richa and Harsh to keep a track of the performance of their investments and make timely decisions to switch between different securities. This is where balanced advantage funds offer a major advantage – they work around this market volatility effectively.
Generally, regular hybrid funds have specific prescribed limits which they have to maintain when allocating funds between debt and equity securities. When it comes to balanced advantage funds, however, they don’t have this limitation. The fund managers can move the allocations of balanced advantage funds more dynamically and they don’t have to stick to a specific exposure limit.
The fund managers of balanced advantage adjust the equity allocation based on certain internal valuation processes and tools. When the equity valuations are expensive, these fundsreduce their equity allocation and put more funds towards debt instruments. Conversely, they increase the equity holdings once the valuations fall. This strategy essentially makes use of the classic investing wisdom, buy low and sell high. This also works because the equity and bond markets tend to share an inverse relation. Historic performance of securities shows that when the equity market is down, bond yields go up.
Hence, one of the biggest balanced advantage benefits is that depending on the market sentiments, earnings, valuations, macro-economic trends, etc., the fund manager effectively adjusts the funds from one asset class to another. This way the fund aims for capital appreciation while hedging against market volatility.
Performance of balanced funds in face of volatility
Market volatility is something that can never be done away with when it comes to investing. There are several micro and macro-economic factors that can trigger it. These include government policy reforms, geopolitical events, natural disasters, a pandemic like COVID-19, inflation rates, etc. So, since market volatility cannot be eliminated, it has to be navigated prudently and that’s one of the major advantages of balanced advantage funds.
The reason why balanced advantage funds are becoming increasingly popular is that when the markets slip, balanced advantage funds tend to correct less compared to the broader market. To illustrate this, let’s look at the performance of four well-performing balanced advantage funds against the Nifty 50 benchmark index over recent periods of market correction:
|Balanced Advantage Fund/Index||September to December 2018||July to October 2019||February to May 2020||October to November 2021|
As you can tell, balanced advantage funds corrected significantly less than the benchmark index. Even when the pandemic broke out in early 2020, the balanced advantage funds’ average returns fell by only around half as much as that of Nifty 50.
Balanced advantage funds benefits
Here are some of the important advantages that balanced advantage offer by working around the ups and downs of the market:
- Equity taxation
Equity-oriented funds are taxed lower than debt-oriented funds for both short-term and long-term capital gains. While balanced advantage funds have a mix of both types of securities, they tend to maintain a gross equity exposure at 65% or above and hence have equity taxation. Their effective equity exposure, however, is usually lower than 65% and they do this by using derivatives.
- Limits the downside
When it comes to investing, aiming to minimise losses is as important as maximising returns. A balanced advantage fund enables you to prioritise both these objectives by maintaining a proportion of equity and debt instruments that’s ideal given the current market situation.
- Does away with the need to time the market
The essence of balanced advantage funds is to dynamically change the fund exposure by closely tracking the market. So, when you have an expert fund manager taking care of this, you don’t have to worry about trying to time the market or making uninformed decisions that may harm your portfolio.
- Keeps the investing strategy objective
It’s normal for investors to get anxious or aggressive in their decisions when the markets are volatile. Adopting a herd mentality, acting on impulse, overestimating notional losses and gains, and losing sight of the bigger picture are common. But one of the primary balanced advantage funds benefits is that these important investment calls are automatic and driven by sound rebalancing strategies.
As you can tell by now, the advantages of balanced advantage funds allow them to grow your capital when the markets are performing well and protect your capital when they take a hit. You can say that the adjustments in equity and debt exposure depending on the market conditions allow your funds to move between thriving and surviving mode in a timely fashion. This strategic and dynamic rebalancing of the portfolio allows balanced advantage funds to strike a balance between risks and rewards and help you meet your financial goals more effectively.
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