A complete guide to balanced advantage funds

If you are a new investor, one of the scariest things about investing is market volatility. However, by understanding market volatility, you can ride its waves and use it to your advantage. One way of doing this is by investing in a balanced advantage fund (BAF). BAFs, also known as dynamic asset allocation funds, are hybrid mutual funds that dynamically allocate assets between equity and debt instruments.

In other words, balanced advantage funds invest in a mix of stocks and fixed-income instruments. Moreover, these funds can change their equity-debt allocation based on the market conditions, thus mitigating risk, and optimising the return potential.

• Table of contents

• What is a balanced advantage fund?
• Understanding the basics of investing
• Step-by-step balanced advantage fund investment guide for beginners
• Tips for successful investing in balanced advantage funds
• Features of balanced advantage fund
• Why is a balanced advantage fund an all-season fund?
• Tips to enhance the return potential from balanced advantage fund
• Why should you invest in balanced advantage funds?
• Key factors to consider before investing in balanced advantage funds
• Bajaj Finserv Balanced Advantage Fund

What is a balanced advantage fund?

A balanced advantage fund – also known as dynamic asset allocation fund – is a type of hybrid fund that invests in both equities and debt securities. These funds do not have specific limits on asset allocation, meaning there is no minimum or maximum threshold for exposure to either asset class. This flexibility allows fund managers to adjust the allocation based on market conditions.

In times when equity valuations are high, balanced advantage funds can decrease their exposure to equities, taking advantage of potential growth opportunities. Conversely, during periods of market decline, the funds can increase their equity exposure for attractive valuation. This ability to dynamically switch between asset classes sets balanced advantage funds apart from other funds.

By investing in balanced advantage funds, investors gain access to a diversified portfolio. The funds provide a mix of both asset classes, allowing investors to benefit from potential capital appreciation while also mitigating impact on capital during market downturns.

Understanding the basics of investing

Before diving into balanced advantage funds, it's essential to understand the basics of investing, including how new investors can invest in balanced advantage funds. This includes setting financial goals, assessing risk tolerance, and creating an investment plan aligned with your objectives. Additionally, it is important to familiarise yourself with concepts such as asset allocation, diversification, and the importance of a long-term investment horizon.

Step-by-step balanced advantage fund investment guide for beginners

Research and select a fund: Begin by researching various balanced advantage funds available in the market. Consider factors such as fund performance, expense ratio, fund manager expertise, and the fund's investment approach. Choose a fund that aligns with your investment goals and risk tolerance.

Complete KYC process: To invest in mutual funds, including balanced advantage funds, complete the Know Your Customer (KYC) process with a registered KYC registration agency (KRA). Submit the necessary documents such as identity proof, address proof, and PAN card to fulfil KYC requirements.

Choose investment mode: Decide whether you want to invest in balanced advantage funds through a lumpsum investment or via a systematic investment plan (SIP). SIP allows you to invest a fixed amount regularly, promoting disciplined investing and eliminating the risk of market timing. A SIP calculator online helps you to estimate the potential returns.

Open an account: If you don't already have one, open an investment account with a registered mutual fund distributor or through an online investment platform. Provide necessary details and complete account opening formalities.

Submit investment form: Fill out the investment form provided by the mutual fund distributor or online platform. Specify the amount you wish to invest, fund name, investment mode (lumpsum or SIP), and other required details.

Monitor your investment: After investing in a balanced advantage fund, regularly monitor your investment's performance. Review your portfolio periodically to ensure it remains aligned with your financial goals and risk tolerance. Consider rebalancing if necessary.

Tips for successful investing in balanced advantage funds

While the potential merits of balanced advantage funds are evident, it's important to approach any investment decision with due diligence. Here are some key factors to consider before committing your capital:

Risk tolerance and investment horizon: Assess your risk appetite and investment time horizon. This will help determine which fund to choose based on appropriate allocation between equity and debt within the fund.

Fund manager track record: Research the track record and experience of the fund manager. A seasoned manager with a consistent performance history can instil confidence in your investment choice.

Expense ratio and other costs: Evaluate the fund's expense ratio and any associated costs. Lower expenses can have a positive impact on your overall returns.

Historical performance: While past performance doesn't guarantee future results, it provides insights into how the fund has navigated different market conditions.

Features of balanced advantage fund

Dynamic asset distribution

The principal advantage of balanced advantage funds is their flexibility in responding to fluctuations in the stock markets. These funds are hybrid mutual funds and stick to a flexible asset allocation strategy, switching between debt and stocks in response to changes in the market. A balanced advantage fund may proactively lower its exposure to stocks during periods of elevated volatility, aiming to mitigate the impact of market fluctuations.

Risk reduction

Risk is often elevated by market volatility, but balanced advantage funds are intended to control and reduce this risk. Because of these funds' dynamic character, portfolio adjustments may be made quickly, thereby seeking to lessen the effect of market downturns. In volatile times, investors may find the risk control features of balanced advantage funds to be a useful resource for a more comfortable investing journey.

Eliminates market timing

Even seasoned investors struggle to time the market perfectly. This process is made simpler by balanced advantage funds, which modify asset allocation by a model based approach in response to changes in the market. This eliminates the element of guessing and provides a simpler method for navigating through market turbulence.

Returns during unstable times

While no investment is immune to market volatility, balanced advantage funds strive to deliver a relatively smoother return profile. These funds aim to provide investors with a more comfortable transition during periods of unpredictable markets by investing in equities during favorable circumstances and switching to debt during uncertain times.

Ease during market storms

Simplicity and stability are assets during turbulent times in the market. That's precisely what balanced advantage funds seek to provide. These funds enable you to weather the constant market storms while letting the fund manager handle the complexity. This helps save time and effort from continuously monitoring and modifying your financial portfolio.

Why is a balanced advantage fund an all-season fund?

Traditional asset allocation approaches involve maintaining fixed percentages of equity and debt exposure no matter the market condition. For example, an aggressive hybrid fund may be mandated to allocate 65% in equity and 35% in debt at all times.

However, market cycles are never static and different asset classes behave differently during economic ups and downs. This helps Balanced Advantage Funds to capitalize on opportunities and manage risks effectively through different market phases.

Tips to enhance the return potential from balanced advantage fund

Increasing the return potential requires careful consideration and strategic decision making. Here are some tips to help you achieve this objective:

• Understand the fund's investment strategy: Gain a thorough understanding of the fund's investment strategy and objectives. This knowledge will help you align your expectations and make informed investment decisions.
• Set realistic financial goals: Clearly define your financial goals and time horizon. Determine whether you are investing for short-term or long-term objectives.
• Regularly review and rebalance: Regularly review the performance of the balanced advantage fund and assess whether it aligns with your goals. If necessary, rebalance your portfolio by adjusting the asset allocation to maintain the desired risk-return balance.
• Leverage Systematic Investment Plans (SIPs): Consider investing through SIPs. This strategy helps mitigate the impact of market volatility and potentially enhances your overall returns.
• Monitor economic and market conditions: Stay informed about the broader economy and market trends that may impact the fund's performance. Stay updated on interest rates, inflation, corporate earnings, and geopolitical developments.
• Seek professional advice: If you are uncertain about making investment decisions on your own, consider seeking guidance from a qualified financial advisor.
• Stay invested for the long term: Investing in a balanced advantage fund with a long-term perspective can yield better results.

Why should you invest in balanced advantage funds?

Balanced advantage funds have the potential to exhibit lower volatility as compared to aggressive hybrid funds by maintaining lower equity allocations during market peaks. The strategy of balanced advantage funds is to generate risk-adjusted returns over the long term. In summary, balanced advantage funds aim to optimise returns by dynamically adjusting their equity allocation based on market valuations. This approach can potentially reduce volatility and generate favourable risk-adjusted returns over an extended investment horizon. Investors should seek professional advice regarding the tax implications associated with these funds to make well-informed investment choices.

Key factors to consider before investing in balanced advantage funds

Dynamic asset allocation: Balanced advantage funds have the flexibility to dynamically allocate their assets between equities and debt instruments. This allows fund managers to adapt to changing market conditions and take advantage of opportunities while managing risk. The ability to adjust asset allocation based on market valuations can enhance return potential and minimise downside risks.

Risk mitigation: These funds aim to reduce volatility by maintaining lower equity allocations during market peaks. This can be particularly suitable for investors with a lower risk appetite looking for a balance between growth and stability.

Potential for risk-adjusted returns: The dynamic asset allocation strategy employed by balanced advantage funds aims to generate risk-adjusted returns over the long term. By capitalising on market inefficiencies and adjusting exposure to equities based on valuation levels, these funds seek to deliver competitive returns while managing risk.

Bajaj Finserv Balanced Advantage Fund

The Bajaj Finserv Balanced Advantage Fund is an open-ended dynamic asset allocation fund. The investment objective of the scheme is to capitalize on the potential upside of equities while attempting to limit the downside by dynamically managing the portfolio through investment in equity & equity related instruments and active use of debt, money market instruments and derivatives.

However, there is no assurance that the investment objective of the Scheme will be achieved. This is achieved through investments in equity and equity-related instruments, along with active utilisation of debt, money market instruments, and derivatives. It's important to note that while the fund aims to achieve its investment objective, there is no assurance of its success. For a detailed scheme information, click here.

Conclusion:

Balanced advantage funds offer beginners a suitable opportunity to invest in a dynamic asset allocation strategy that adapts to market conditions. By following a step-by-step approach, staying informed, and focusing on long-term investing, beginners can effectively invest in balanced advantage funds and work towards achieving their financial goals.

FAQs:

What is the minimum investment requirement for balanced advantage funds?

The minimum investment requirement in balanced advantage fund differs from fund to fund with some funds having an minimum investment requirement as low as Rs. 500 for both SIP and lumpsum.

Can I invest in balanced advantage funds through a systematic investment plan (SIP)?

Yes, most balanced advantage funds allow investors to invest through a systematic investment plan (SIP), which involves investing a fixed amount at regular intervals. SIPs promote disciplined investing and help mitigate market timing risk.

What are some balanced advantage fund investment tips for beginners?

Start with a clear investment goal, assess your risk tolerance, and consider SIPs. Seeking professional advice and maintaining patience for long-term growth are also important.

Are balanced advantage funds suitable for conservative investors?

Balanced advantage funds can be suitable for conservative investors looking for a balanced approach to investing. These funds aim to provide relative stability through asset allocation between equity and debt.

What are the risks associated with balanced advantage funds?

Balanced advantage mutual funds carry market risks, including the potential for losses in equity investments during market downturns. The fund's performance is also dependent on the accuracy and effectiveness of the asset allocation strategy employed by the fund manager.

Can balanced advantage funds guarantee returns or prevent losses?

No, balanced advantage funds cannot guarantee returns since market conditions can unpredictably impact performance. They also cannot fully shield investors against losses as they have an equity component that is subject to volatility. However, balanced advantage funds try to mitigate downsides through dynamic risk management.

What is the minimum investment required for Bajaj Finserv Balanced Advantage Fund?

There are two ways to invest in the fund – lumpsum or SIP. The minimum application amount for both is Rs. 500.

How is the asset allocation managed in Bajaj Finserv Balanced Advantage Fund?

These funds maintain a flexible asset allocation strategy, allowing a maximum equity exposure of 90% and a minimum of 65%. The remaining allocation is in debt and money market instruments.

Who should opt for balanced advantage funds?

Balanced advantage funds are suitable for investors seeking a balanced mix of growth potential and risk management within a single investment vehicle.

Are balanced advantage funds suitable for long-term investments?

Balanced advantage funds can be a preferred option for long-term investments, especially for investors who are looking for more dynamic asset allocation strategy. However, it is important to consider one's investment goals, risk tolerance, and investment horizon before making any investment decisions

Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.
This document should not be treated as endorsement of the views/opinions or as an investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.