Equity mutual fund schemes employing a dynamic asset allocation method include balanced advantage funds. These funds are adaptable and distribute capital across equity or debt assets depending on the state of the market. Therefore, these funds tend to do well even in a volatile market, provided they are handled efficiently.
How to invest in a balanced advantage fund?
There are balanced advantage funds that employ a bear approach for risk-averse investors. These funds buy equities when they are cheap and sell them when they rise in value. Because the investments are sold whenever the market rises and are bought when the market starts to fall, this technique is referred to as “counter-cyclical”.
According to market conditions, the fund manager often uses a process-driven strategy (also known as an asset allocation model) to switch the portfolio between two assets, equities and debt. For instance, the fund manager may lean the asset allocation towards debt when stock prices are high and towards equities when stock prices are low.
Factors to consider before investing in a balanced advantage fund
- Dynamic allocation
The limitations of a pure balanced fund are absent with a balanced advantage fund. Therefore, depending on the state of the market, they can significantly alter or increase their allocation to debt and equity – 0% to 100% in equity and equity-related instruments and 0% to 100% in debt instruments. Because of this, such funds can offer a more robust long-term mix of returns, surpassing inflation while producing a significantly greater return than a typical debt or balanced fund.
- Stable growth
Returns provided by BAFs are much more stable than those of a pure equity fund since they can lessen the fall in investment valuation during market downturns. This assists in the process of wealth building and puts investors’ concerns to rest. It is important to note that a dynamic asset allocation approach typically outperforms the indices by a significant margin during periods when returns from important indices are minimal.
- Risks
Balanced advantage funds invest in debt securities in addition to equity funds depending on market conditions, which may help reduce overall portfolio risk and aid your goal of generating wealth over time.
- Tax benefits
Equity taxation may be a major benefit for balanced advantage funds because they employ derivatives to hedge. Since capital gains are taxed at 10% (excluding indexation) if held for more than 12 months and 15% if the fund units are sold before 12 months, these funds often benefit from equity taxation.
In conclusion, the asset allocation of such balanced advantage funds is dynamic due to the unpredictable nature of the market. So when the valuation is low, equity is added, and when the valuation is high, debt is preferred. Dynamic asset allocation seeks to lower downside risk while providing investors with better risk-adjusted returns.
