Balanced advantage funds: Strategies for different market phases

The Indian markets have witnessed different phases in the last few decades. Some periods saw strong bull runs while others brought volatility and corrections. As an investor, it is important to understand how different investment strategies perform in varying market conditions. Balanced advantage funds aim to adapt to different market phases by dynamically changing their equity-debt mix. They seek to generate long term capital appreciation along with current income by judiciously allocating between equity and debt.

Read on to learn more about balanced advantage fund strategies for different market phases.

• Table of contents

1. Market phases and their characteristics
2. Adaptive strategies of balanced advantage funds
3. Advantages of Using Balanced Advantage Funds in Different Market Phases
4. Managing risk through diversification
5. Conclusion - Balanced advantage fund for different market phases

Market phases and their characteristics

Bull phase - Characterized by a sustained rise in stock prices driven by strong fundamentals, positive sentiment, and abundant liquidity. Equity markets deliver healthy returns.

Consolidation phase - Prices move sideways after an up move. Fundamentals are stable but high valuations arrest further price rises in the short run. Volatility remains low.

Bear phase - Prolonged period of declining stock prices led by weakening economic and corporate fundamentals. Volatility rises on decreased risk appetite.

Recovery phase - Transition period after a bear phase where markets try to bottom out on signs of improving macros. Opportunity for selective stock picking arises.

Adaptive strategies of balanced advantage funds

Bull phase - Funds maintain higher equity allocation to participate in upward market movement. Portfolio tilted towards large caps, sectors with strong earnings visibility.

Consolidation phase - Equity allocation lowered, and profit booked on some positions. Exposure diversified to include mid/small caps. Debt increased for relative portfolio stability.

Bear phase - Equity cut down sharply to limit downside. Cash levels raised for re-entry. Short term/floating rate debt holdings provide a cushion.

Recovery phase - Gradual increase in equity exposure as valuations become reasonable. Quality mid/small caps added selectively. Dynamic fixed income allocation helps preserve gains.

Advantages of using balanced advantage funds in different market phases

Balanced advantage funds can leverage different market conditions due to their dynamic asset allocation strategy, which adjusts exposure to equities and debt based on market trends. This is how such a fund may adapt to market movements:

Bull market: BAFs may seek to capitalise on the upside potential of bull markets by maintaining significant equity exposure.

Bear market: They may reduce equity exposure and increase debt allocation to help mitigate the impact of volatility in declining markets. Debt instruments can offer relative stability, helping mitigate overall portfolio losses.

Managing risk through diversification

Balanced advantage funds aim to manage risk through diversification across asset classes and sectors. During volatile phases, they diversify equity holdings to reduce portfolio volatility.

Diversification across sectors: Equity allocation is spread across various sectors to minimise risk from any single sector. Sectors exhibiting weakness are underweighted while potential sectors are overweighted. This cushions against the downside if any sector faces challenges.

Diversification across market caps: Large, mid, and small cap companies are included in appropriate proportions depending on their relative attractiveness. During bearish periods, higher weightage may be given to large caps due to their greater resilience. In recoveries, mid and small caps are added to participate in turnaround.

Conclusion - Balanced advantage fund for different market phases

Balanced advantage funds aim to offer equity upside with downside mitigation through their adaptive multi-asset approach. Their flexible mandates allow dynamic shifts between asset classes factoring in valuation changes. For investors with moderate risk appetite and long-term goals, these schemes can provide potentially inflation-beating returns in the long run. Periodic review of market phases helps timely adjustment of equity exposure through such schemes. For example, one can consider investing in the Bajaj Finserv Balanced Advantage Fund for taking advantage of its active asset allocation approach across different market cycles. For a detailed scheme information, click here.

FAQs:

How do balanced advantage funds differ from other types of funds?

Balanced advantage funds differ from other fund categories due to their dynamic asset allocation approach which aims to optimise the risk-adjusted return potential over the long run. Compared to pure equity funds, they provide lower volatility by allocating a part of their portfolio to debt as well. Unlike normal hybrid funds with a fixed equity-debt ratio, balanced advantage funds actively change their asset mix based on market conditions.

What are the risks associated with investing in balanced advantage funds?

There are some inherent risks associated with investing in balanced advantage funds. Since these funds have the mandate to dynamically allocate their assets between equity and debt based on market conditions, there is a risk of improper asset allocation decisions by the fund manager if their market reads go wrong. If a fund manager makes wrong calls on adjusting the equity-debt ratio, it can impact the overall returns delivered by the scheme. Additionally, like all mutual funds, balanced advantage funds also carry market risk as their NAVs are dependent on the performance of the underlying securities.

Can balanced advantage funds guarantee positive returns in all market phases?

While balanced advantage funds aim to deliver positive returns across different market cycles through active asset allocation, it would be incorrect to say that they can guarantee positive returns in all phases. No investment is completely devoid of risks and market dynamics are unpredictable at times. Balanced advantage funds strive to manage risks judiciously and generate optimal risk-adjusted returns over the long term by dynamically adjusting their equity-debt mix based on prevailing market conditions.

What makes balanced advantage funds effective in managing market phases?

Balanced Advantage Funds (BAFs) use dynamic asset allocation to manage market phases. During downturns, they may reduce equity exposure and increase debt allocation to mitigate downside risk. During upturns, they may increase equity exposure to capture market gains. The key factors for their effectiveness are flexibility, risk management focus, and professional management.

How do fund managers decide asset allocation in balanced advantage funds?

Fund managers of Balanced Advantage Funds (BAFs) use several factors to determine asset allocation. Key considerations can include market valuation (e.g., P/E, P/B ratios), economic indicators (e.g., interest rates, inflation), market volatility, and quantitative models. Fund managers also apply their discretion based on market analysis and investment philosophy.

Are balanced advantage funds suitable for conservative investors?

Balanced Advantage Funds (BAFs) may not suit extremely conservative investors due to equity component. While they aim to optimally balance risk and return potential, they are still exposed to market risks, especially with regard to their equity portion. Thus, investors still need to be able to stomach short-term volatility.

Can I rely on BAFs for long-term financial goals?

Balanced Advantage Funds (BAFs) that typically lean towards equities can be suitable for long-term financial goals like retirement planning, owing to the long-term growth potential of equities. However, their mandatory debt allocation may somewhat lower their return potential when compared to pure equity funds.

How do balanced advantage funds handle market downturns?

Balanced Advantage Funds (BAFs) aim to reduce the impact of market downturns by dynamically adjusting their portfolio. During downturns, they may reduce equity exposure to mitigate loss. Performance varies based on market conditions, fund manager decisions, and allocation strategy.

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 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.