Exploring the performance of balanced advantage funds during market volatility

Each investor has different financial objectives. Some want reasonable returns and opt exclusively for equities. Others want less volatility on the invested capital and opt for debt funds. But what if you want both – reasonable returns along with reduced impact of market downturns? Enter Balanced Advantage Funds, also known as Dynamic Asset Allocation Funds. These hybrid mutual funds plans invest in a healthy mix of both equity and debt and modify the allocation to match the market sentiment.

• Table of contents

1. What are balanced advantage funds (BAFs)?
2. Benefits of balanced advantage funds
3. Here are some benefits of investing in a BAF:
4. Role of balanced advantage funds in a volatile market
5. Who should invest in balanced advantage funds?

What are balanced advantage funds (BAFs)?

Balanced advantage funds are hybrid funds that invest in both equity and debt. The fund manager constantly changes the portfolio allocation depending on market conditions. While some funds rely on the manager’s market expertise, others use asset allocation models for portfolio recommendations.

Benefits of balanced advantage funds

Balanced advantage funds are managed by professionals who allocate the resources at hand in the best possible way. In comparison, a pure equity fund can only invest in equity and is, therefore, vulnerable to massive volatility depending on the market situation.

Here are some benefits of investing in a BAF:

Diversification: Investors’ money is put into different asset classes. So, if one class of assets underperforms, an upswing in another asset class can offset potential losses.

Relatively lower risk: The debt component ensures that balanced advantage funds have relatively lesser exposure to volatile equity markets. Thus, there is lower risk of significant capital erosion during market downturns, making these schemes suitable for investors with a low/low to moderate/moderate/moderately high risk appetite.

Flexibility: Balanced advanced funds are flexible as they are free to invest in both debt and equity. Moreover, dynamic portfolio adjustment ensures that the underlying securities are constantly churned to match the market sentiment.

Role of balanced advantage funds in a volatile market

During market downturns, assets like equity and real estate are the first to turn bearish. But if you have invested in a dynamic asset allocation fund, you will minimize your risks no matter what the market is like. Since most BAFs strive for a relatively lower equity allocation at market peaks, they tend to experience lesser drawdowns during market corrections.

Additionally, BAFs can also increase the equity allocation during periods of low valuations, thereby generating potential risk-adjusted capital appreciation over long investment horizons. Typically, most investors tend to invest more when markets are rallying and stay away when stock prices are falling. However, BAFs deploy investment models to remove emotions from trading decisions; the asset allocation is decided based on the model’s recommendations.

In a nutshell, BAFs seek to follow the age-old investment principle of “buying low and selling high”.

Who should invest in balanced advantage funds?

Investors with a low/low to moderate/moderate/moderately high risk appetite: Dynamic asset allocation funds are suitable for new investors who want the potential returns of an equity fund without the associated volatility.

Investors with a long investment horizon: These schemes can also be considered by investors who are looking for the mutual funds to invest in for the long term.

Investors who are undecided: Investors waiting for a market correction before investing in equity can park their funds in a dynamic asset allocation fund in the interim.

Conclusion

A balanced advantage fund can help investors diversify their investments and generate potentially risk-adjusted returns in all market conditions. Since BAFs strive for a relatively lower equity allocation at market peaks, they experience lesser drawdowns during market corrections. Additionally, BAFs can increase their equity allocation when valuations are low, thereby creating the potential for capital appreciation over the long term.

However, the potential returns from a balanced advantage fund depend on the expertise of the fund manager, who has to constantly rebalance the portfolio to match the market conditions. It is also advisable to check out the expense ratio of a particular scheme before putting your hard-earned money into it. Remember to always consult a financial advisor before making any investment decisions.

FAQs:

How does a balanced advantage fund perform during market volatility compared to other types of funds?

Balanced advantage funds seek to provide relative stability during market volatility. They do so by dynamically adjusting their asset allocation between equities and fixed income based on market conditions.

What factors should I consider when evaluating the performance of a balanced advantage fund during market ups and downs?

When assessing the performance of a balanced advantage fund during market volatility, consider factors such as the fund's asset allocation changes, and its risk-adjusted returns. Evaluate whether the fund's strategy aligns with your risk tolerance and investment objectives.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
This document should not be treated as an endorsement of the views/opinions or as 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