Balanced Advantage Funds - Diversification driving returns

Once you become employed and start earning your salary, well-wishers and elders will prompt you to start your saving and investing journey. While previously, saving meant parking surplus funds in fixed deposits or recurring deposits, the consistent rise in inflation has made these options appear lacklustre. Then came the possibility of investing online, ensuring that all of us can find optimal avenues for participating in the market growth story and meeting our financial goals. As an investor, the first tenet you must follow is that of diversification. And the best way to achieve diversification is through optimal asset allocation. This means investing your money across multiple investments that are uncorrelated. As a result, while one investment in your portfolio might experience negative movements, the other investments can help balance out the negativity either by not reacting or by reacting positively. 

However, how do you ensure proper asset allocation? Enter balanced advantage funds(BAFs), one of the best options for when you wish to diversify across debt and equity instruments in a way that you can benefit from the return potential of equities and enjoy the safety offered by debt investment. A review of balanced advantage funds indicates that these funds follow a dynamic asset allocation strategy seeking to balance portfolio exposure between equity and debt market opportunities. This strategy takes into account the fact that different asset classes are subject to disparate risks and earning potential, at different points in a singular market cycle, ensuring that your investment earns strong returns while facing lower volatility.  

Why choose balanced advantage funds?

As a novice or somewhat inexperienced investor, you might face trouble while trying to time the market. In fact, markets are known for being unpredictable, and with emotions at play when it comes to money, you may end up with more losses than gains. If you choose mutual funds and go with a systematic investment plan (SIP) , you will remain committed for a longer term and face mitigated risks. Further, if you choose to start an SIP in a balanced advantage fund then the benefits of investing get further amplified. Some of the reasons why you should choose BAFs include:

• Diversification: Since the fund invests dynamically across both equity and debt instruments,  you can enjoy a degree of portfolio diversification by investing in a single mutual fund.
• Flexibility: Your money will follow the flexible investment policy, as fund managers can alter their positions based on the market outlook.
• Invest across market caps: While equity investments would allow you to park funds in specific market capitalisations, BAFs seek opportunity across different caps, helping your investment grow at all times.
• No need to time the market:It is well-known that trying to time the market is a challenging and often wasteful exercise. Yet, we are also often told that we should buy at market bottoms and sell at market peaks. You might be wondering how you can do both. Well, this is the superpower of BAFs. While you personally don’t need to time the market, BAFs ensure that they are able to take advantage of market up moves and protect the portfolio during market down moves.

Potentially higher returns than debt funds, at lower risk than equity investments: With equity exposure ranging between 65% to 100%, based on market outlooks, BAFs ensure monthly monitoring and quarterly rebalancing of your portfolio. This helps create long-term wealth while also enabling you to ride out the market downside.

The key lies in how BAFs are managed

The above benefits make BAFs a very compelling investment choice. But the question to ask here is, “Will investment in any BAF help you reap all of the above benefits?” Possibly not. The key lies in how investment decisions are taken. From that perspective, there are two primary approaches to asset allocation followed by BAFs.

• First is the value based or counter cyclical approach. This approach evaluates valuation signals like Price/Earnings ratio, Price/Book Value ratio, dividend yield, etc., to determine and adjust equity allocations. The basic tenet followed is that as valuations fall, the exposure to equity increases and vice versa. This is a more commonly known approach as it follows the conventional buy low and sell high approach.
• The second approach, which is more popular globally, is the pro cyclical approach. The basic premise of this approach is that markets follow broad trends and there is merit in identifying these trends and investing accordingly. By using price driven signals, the effort is to identify the trend in the market and invest with the trend. When markets are in a strong up trend, the model increases allocation to equity and when markets are in a decline, the model reduces equity allocation.

Both approaches have relative merits and disadvantages and it is important to assess the performance of the fund across multiple cycles to understand whether it is well-suited for your portfolio.

With a variety of benefits and the potential for strong yet stable returns, balanced advantage funds can be your best bet at almost every stage of your investment journey. Just remember to stay invested for a longer tenure to enjoy the best returns.

An investor education initiative by Edelweiss Mutual Fund

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