Unlock the secret to balanced advantage funds and skyrocket your returns!
Balanced advantage funds, also known as dynamic asset allocation funds, are a type of hybrid mutual fund that aim to balance equity and debt allocations based on market conditions. These funds dynamically adjust their asset allocation between equities, debt securities, and cash equivalents to capitalize on market opportunities and manage risks. The flexibility allows fund managers to reduce equity exposure when markets are overvalued and increase it when valuations turn attractive. This dynamic approach helps mitigate risks during market downturns while benefiting from rallies in bull markets.
How do balanced advantage funds work?
Balanced advantage funds do not follow a fixed asset allocation between equity and debt. Instead, fund managers determine the allocation based on quantitative valuation metrics like the price-to-earnings ratio, price-to-book ratio, and dividend yields of the overall market. When the market appears overvalued by these measures, the equity component is reduced, and more assets are shifted to debt and cash. Conversely, when valuations turn attractive, equity allocation is increased to generate higher returns.
Though equity exposure in balanced advantage funds can drop below 30% in extreme bear markets, it generally ranges between 65-80% in neutral to bullish markets. The remaining portfolio is invested in fixed-income instruments like bonds, money market securities, and cash equivalents. The fund manager actively rebalances the portfolio from time to time to maintain an optimal asset mix for prevailing market conditions. This dynamic mechanism aims to buy low and sell high across market cycles.
Advantages of investing in balanced advantage funds
- Dynamic asset allocation
The dynamic mechanism in these mutual funds allows capitalizing on equity valuation swings by increasing allocation at lower valuations and reducing it when overvalued. This buy low, sell high approach can aid in wealth creation.
- Lower volatility
The debt in these mutual fund investments component provides stability and offsets part of the volatility inherent in equities. This balanced approach curbs downside risk compared to pure equity funds.
- Diversification
Exposure across equity and debt assets leads to diversification benefits. This reduces concentration risk and volatility.
Wealth creation with risk management: The funds aim to benefit from equity market rallies through flexible allocation while limiting losses in bear markets by increasing debt and reducing equity. This can aid long-term wealth creation with prudent risk management.
Who should invest in balanced advantage funds?
Balanced advantage funds can suit investors with moderate risk appetite looking for dynamic investing in equities coupled with downside protection from debt. The funds can be ideal for novice investors seeking exposure across asset classes in a single fund. Investors should have an investment horizon of at least 3-5 years to benefit from the flexible asset allocation approach of the funds. The funds can also complement pure equity and debt funds in an investor’s portfolio to balance risk and return. However, selection of the right fund and regular reviews of performance are advisable.
How to select the best balanced advantage fund?
When selecting a balanced advantage fund, analyze the fund manager’s track record in dynamically managing asset allocation based on valuation. Choose a fund with relatively lower expense ratio compared to peers. Review the fund’s performance across market cycles to assess how well it has contained downside risks and generated returns through flexible allocation. Analyze portfolio composition to ensure adequate diversification across market cap segments in equity and high credit quality in fixed income. Additionally, choose a fund with sufficient assets under management and adequate liquidity to handle fund flows efficiently.
Balanced advantage funds can be effective instruments for dynamic asset allocation and risk-managed equity investing for investors with moderate risk appetite and 3–5-year investment horizon. Prudent selection of the right fund along with regular performance review is key to benefitting from these funds.
