At a time when the equity market has become volatile, individuals are increasingly investing in balanced advantage funds for better risk adjusted returns. These funds are open-ended hybrid funds and they limit the downside and optimise the potential upside in a volatile market. The fund manager decides on the allocation based on the price-to-earnings ratio of the stocks and the changing market conditions.
Balanced advantage funds can help investors mitigate market volatility and returns on such funds are more dependable over longer periods as the investment is spread out. Moreover, such funds are ideal for retail investors as they do not have to monitor their asset allocation frequently as the fund manager does this dynamically and maintains the right asset mix in any prevailing market conditions.
In a balanced advantage fund, an investor can gain when equity markets move up and protect it when they go down. So, an investor can gain from both rising and falling markets by investing in these funds. Moreover, one can stay disciplined by overcoming emotional biases in uncertain markets and look for regular income via systematic withdrawal plan.
Mix of equity and debt
As the market regulator does not specify any minimum or maximum limit either for debt or equity investment in balanced advantage funds, it makes this fund a better choice within all hybrid funds for investors. However, these funds provide downside risk protection as they limit the downside in a falling market.
In balanced advantage funds, fund managers increase the exposure to equities when the investment metrics become favourable and bring it down when the metrics become unfavourable. The fund manager may sell assets with high valuations and purchase assets that may be fairly valued depending on the scheme’s investment strategy. This can improve the risk-adjusted return for long term investors.
Investors who would like to rely on the expertise and skills of fund managers in deciding the allocation in equities and debt should look at these funds. Investors must choose a fund which invests in large-cap companies on the equity side and high quality AAA rated bonds and similar securities on the debt side.
Experts say in the prevailing market conditions where valuations are stretched and the benchmark indices are at an all-time high, balanced advantage funds can be a good bet. In these funds, when valuations become expensive, fund managers reduce allocation to equity and increase allocation to debt. Alternatively, when valuations are cheap, fund managers increase allocations to equity.
These funds can help reduce volatility and risk and depending on the market conditions, asset management companies fix the equity exposure. Most funds in this category have an equity allocation between 30 to 65%.
Experts say investors should consider a longer investing period and benefit from equity taxation. Typically, in the short term, balanced advantage funds can give negative returns. So, to overcome this risk, experts suggest that the investment period should be at least three to five years.
Experts suggest that balanced advantage funds are suitable for those investors who are looking for a more aggressive alternative to pure debt funds and want to invest in equity for higher return potential, while limiting their losses in case the markets fall.