An ode to mutual funds’ popularity is evident in a large number of fund houses, schemes, and types of mutual funds that are available to choose from. One of these is the balanced advantage fund, sometimes also referred to as a hybrid mutual fund.
Mutual funds are one of the simplest, most convenient, and most effective ways of meeting your financial goals. The ease of investing and the hassle-free process of doing so are just a few of the reasons that make them the investment instrument of choice for a large majority of the Indian youth. Starting early and staying invested are the mantras to build long-term future wealth, courtesy of the power of compounding.
What follows is a definitive guide on balanced advantage mutual funds and everything you need to know about them.
A balanced advantage fund, simply put, gives you the best of equity and debt as part of your fund-allocated assets. Hence, it is also referred to as a hybrid fund and is technically known as a Dynamic Asset Allocation Fund.
The most popular investment asset classes are equity and debt. While equity is favoured for its higher returns and ability to build a larger corpus in a reasonable amount of time, debt is preferred due to its stability and low volatility. Traditionally, mutual funds came with the option of investing in only one of the asset classes, albeit across different companies.
So, when you invest in an equity mutual fund, then you might invest in a scheme that holds stocks and securities across various companies with high, indirect exposure to market volatility.
On the other hand, people with a lower risk appetite may choose to hedge their portfolio from market risks by investing in a mutual fund with government bonds, corporate bonds, debentures (a medium/long-term debt instrument), treasury bills, etc. The returns are lower, but so is the risk.
We all know stock markets are volatile, right? They tend to fall and rise based on various socio-economic, geo-political, macroeconomic, and other factors. Had you been fully invested in an equity fund, your returns would be directly proportional to the performance of the market and the underlying stocks in your mutual fund. In a balanced advantage fund, though, the fund manager (appointed by the fund house) keeps reallocating assets based on market movements.
So, when the markets rise, the fund manager might focus more on debt instruments. When the market falls, and stock prices are lower, the fund manager will switch towards buying more equity to raise your fund value. This alternating allocation mechanism between equity and debt is where the term Dynamic Asset Allocation Fund arises from.
Not all balanced advantage mutual funds work the same, though. There are prominent types of allocation models that fund managers use.
Acyclical: The example mentioned above, wherein more equity exposure during falling markets and higher debt exposure when the market rises, is an example of a counter-cyclical asset allocation or acyclical mode. It is because your fund’s activity is against the market trend, focusing on buying the dip.
While stock price is the most commonly used parameter, it doesn’t necessarily need to be so. Some fund managers use other telling factors such as Price to Book Value (PB Ratio), Price to Earnings Ratio (PE Ratio), or Dividend Yield to predict market movement and stock performance.
Cyclical: When your fund manager goes with the market flow, raises equity stakes during market highs, and brings in debts as a rearguard measure during market drops, it is known as a cyclical asset allocation model. Daily moving averages and standard deviation are the most widely used parameters in such a scenario.
Now lean into another aspect of the balanced advantage fund, namely the use of derivatives. While not as prominent as the equity and debt asset classes, derivatives can also be used to hedge your fund from high equity exposure. Typically, fund managers prefer keeping this exposure at the 65% mark. However, different funds may have different strategies and associated risks. Fortunately, in the interest of investors, each mutual fund is obligated to mention the level of risk it comes with clearly, so you can make an informed investment decision.
Having now understood the concept and workings of a balanced advantage mutual fund, let us now get into the benefits of investing in one.
Balanced advantage mutual funds are right for you if you do not have the time/inclination to constantly monitor markets and stress about their performance. Like any investment tool, establish your clear financial goals first to understand the investment horizon and duration. Hybrid funds are not best suited for short-term goals, so ideally, you should consider a horizon of 3 years and beyond. Carefully read the scheme documents and understand the risks before investing in it.
A balanced advantage fund works on the principle of dynamic asset allocation. When the market is up, the fund manager may shift focus towards equity purchases, while in other cases, debt instruments may take preference. Irrespective of the specific approach, the concept is that fund managers keep allocating asset classes to maximise investor returns and minimise risk based on market movements.
The definition of best can vary based on priorities. Some people may focus on returns, while others may prefer a strong market downside protection. Keeping risks, returns, and stability in mind, these are the top 3 balanced advantage funds, as per their performance in the last financial year (with a 3-5 years of investment horizon).
This is not a ranking by any means but a list of some top-performing, stable fund schemes. It is advisable to do your research before investing.
Balanced Advantage Funds offer a diversified portfolio with a mix of equity and debt instruments. Fund managers use dynamic asset allocation and risk management techniques to optimize returns. These funds can offer higher returns compared to pure debt funds with a cushion against market volatility.
Here are some top performing balanced advantage funds -
Yes, balanced advantage funds can be considered risky, as they invest in both equity and debt instruments, which carry their own inherent risks. However, the level of risk may vary based on the fund's investment strategy, asset allocation, and market conditions. It's important to carefully evaluate a BAF's risk profile before investing.
