BALANCED ADVANTAGE FUNDS

balanced advantage fund

Balanced advantage funds are a type of hybrid fund that invests in both, equities and debt instruments. There is no set fixed threshold for exposure to a particular asset class. These funds can also modify their asset allocation as per the market conditions. When the equity market is trading at an all-time high, fund managers may increase the exposure to equities, while reducing it in falling stock markets. Unlike other funds, Balanced Advantage funds not only offer a mix of growth and fixed-income instruments but can also switch between asset classes dynamically. Balanced Advantage Funds asset allocation is determined by the dynamic asset allocation methodology.

How do they work?

Balanced advantage funds have a unique rebalance strategy where they can drastically reduce or increase the asset allocation towards equities or debt. Additionally, if the fund manager anticipates a rise in valuations and key indices, they might increase their equity exposure. But when they anticipate a market crash, fund managers might sell off the stocks and switch to debt instruments, protecting you from significant losses.

Most balanced advantage funds invest around 65% in equities and the rest 35% in fixed-income instruments depending on the fund house’s internal strategy.

Dynamic asset allocation in Balanced Advantage Funds offers the benefit of exponential returns through equity and arbitrage investments as well as provides the security of fixed returns to counter the market risks. Also, offer a better mix of returns that can beat inflation in the long term by minimizing the downside of equity markets.

Features of Dynamic Asset Allocation/Balanced Advantage Funds

Balanced Advantage Funds use the market's inherent volatility as their growth tool through an effective strategy. Equity offers market-linked returns and debt offers a steady income. In the long term, investors must be willing to take risks to earn from stocks while aiming at fixed income. Dynamic asset allocation funds are a good choice for effective wealth creation planning because of their following features:

Key Components: Balanced advantage or dynamic asset allocation funds consist of equity, debt, and arbitrage components.

Unhedged equity and fixed income exposure are normally decided by the asset allocation model of the funds as per current market conditions.

The debt component is capped at 35% as per the norms. However, if markets are going to crash, the debt exposure may be increased.

The arbitrage component is the hedged equities that generate profits or arbitrage from the difference in cash and futures market or corporate actions.

Attributes: Balanced advantage funds are multi-dimensional as they invest in a mix of equities and debt assets as well as arbitrage opportunities. The equity investment targets wealth creation while the debt investment provides security during a market slump and also generates a steady income. Investors invest in equity funds to make profits in rising markets and in bad markets they panic resulting in decisions where they hurriedly shift to debt funds. These knee-jerk reactions can affect the wealth creation goal but balanced advantage funds balance the risks and rewards.

Dynamic Allocation: Dynamic asset allocation funds, as the name suggests can dynamically change the investment in a particular asset class as per the requirements. This feature encashed the high returns of the markets that too with the security of debt instruments. It has unique in-built re-allocation strategies to give risk-adjusted returns. You can time the market in these funds because they rebalance the assets as per the market conditions to make the most out of the market cycle.

Diversified Portfolio: Asset Management Companies (AMCs) prepare investment strategies while allocating funds to various market capitalizations. Apart from investments in multi-instruments of the market, they invest the corpus in large-cap and mid-cap stocks. Large companies ensure stability and mid-cap provide the growth potential. This safeguards the risks of the equity markets.

Taxation: The funds can be taxed as debt or equity funds based on their asset allocation. However, most funds maintain equity exposure to equity derivatives for leveraging the equity tax treatment.

Conclusion: (SEBI) Securities and Board Exchange of India’s re-categorization of funds gave rise to balanced advantage funds, more fondly known as dynamic asset allocation funds. As the term ‘dynamic asset allocation’ suggests, these funds dynamically allocate the corpus to equities and debt with relative freedom. These funds do not have to follow a fixed allocation ratio and can interchange between the equity and debt assets according to relevant market conditions. For maximum returns, they majorly invest in equities, but switch to debt when markets are low.

Location: India

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