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When stock markets rise, we see investors making a beeline for equity. When markets decline, buyers typically hold on and refuse to sell. For effective long-term financial planning, it’s crucial to stay open to taking risks while aiming for fixed returns. That’s where Balanced Advantage Funds (BAF) come in.
Investors putting money into the balanced advantage category through systematic investment plans (SIPs) receive improved SIP returns on their investments. The figures are higher than large-cap, multi-caps, large and mid-caps, small-caps, and mid-cap funds.
Since investment choices differ depending on risk capacities and financial goals, let us take a look at how the balanced advantage category works and why you should invest in it.
Balanced advantage funds are also referred to as dynamic asset allocation (DAA). These are hybrid funds that dynamically manage their exposure to debt and equity instruments. The category was created based on new norms from the Securities and Exchange Board of India (SEBI) and is free of any minimum exposure limits or caps from the same.
While equity investments provide market-linked returns, debt instruments offer fixed returns. Since the fund can shift allocation between the two asset classes based on continually changing market valuations, when the markets rise, your funds move to debt instruments. Meanwhile, if the stocks decline, debt securities ensure a steady income.
The dynamic nature of these funds is attributable to in-house models based on which the fund house makes allocations across different instruments. Furthermore, these funds maintain market exposure to equity derivatives for leveraging equity tax treatment and hedging when stocks are overvalued.
Additional Read: What kinds of investors should opt for mutual funds?
Here’s a guide to understanding the benefits of investing in balanced advantage funds today.
Balanced advantage funds usually manage an equity allocation between 30% and 80% as per the market conditions and the price-earnings ratio. In doing so, DAA funds invest predominantly in stocks and other equity-related instruments to boost long-term capital appreciation. It leads to greater wealth generation, and investment in equities also allows investors to beat current inflation.
When equity valuation is high, fund manager reduces exposure from equity and increases exposure in debt. Exposure to debt acts as a cushion in volatile equity markets. Depending upon investment strategy of each fund, the fund can tactically take duration and credit calls to benefit from higher YTM and price fluctuations, which also further contributes to fund’s performance.
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, you can make pure equity investments and simultaneously manage debt securities. By offering a mix of debt, arbitrage, and equity, the product is best suited for retirement planning and can perform well even in flat markets. Besides, after considering your risk profile, you can blend the scheme with large-funds and debt funds for further diversification.
While the allocation between debt and equity is instrumental in determining the fund's performance, a diverse portfolio has its benefits. With a well-diversified portfolio of securities, DAA funds can offer better risk-adjusted returns.
Additional Read: Investing in International Funds for Portfolio Diversification
If you are a new investor unwilling to withstand present-day market volatility, balanced advantage funds are ideal for you. Yes, these asset allocation funds can serve as risk-adjusted solutions. You can not only invest in debt instruments and diversify but also generate income at lower equity risks.
When looking for a trusted partner to fulfil your financial vision, turn to Tata Capital Wealth. Leverage research-driven market insights and streamline your investment goals with us. Get in touch today!
Policies, Codes & Other Documents