How can balanced advantage funds add relative stability to your portfolio?

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Managing investment risk is one of the most important aspects of growing wealth over the long term. Volatility in the stock markets and uncertainty in the broader economy can wreak havoc on portfolio values if not diversified appropriately.

In such a scenario, balanced advantage funds have emerged as a suitable investment option for Indian investors looking to strike a balance between growth and relative stability. As the name suggests, balanced advantage funds aim to provide the advantages of both equity and debt investments through active asset allocation within pre-defined limits.

These funds dynamically shift between stocks, bonds and cash depending on market conditions, providing relative stability during downturns and participation in upward market movements.

Read on to learn how a balanced advantage fund could offer relative stability to your portfolio.

  • Table of contents
  1. How is the Price-to-Book (P/B) ratio calculated?
  2. What does the Price-to-Book (P/B) ratio indicate?
  3. What does a higher or lower P/B ratio indicate?<
  4. So, what is a good P/B ratio?
  5. What to consider when using P/B ratio
  6. FAQ

Benefits of balanced advantage funds

The key features of balanced advantage funds stem from their unique ability to manage risk through dynamic asset allocation. Some of the main benefits they offer investors include are listed below.

Downside mitigation: By varying equity exposure between 65%-80% and debt between 20%-35%, these funds are structured to mitigate impact on portfolios from sharp falls in stock markets. The debt component provides relative stability while equity drives long term return potential. These funds also use equity derivatives for hedging wherein the net equity exposure can go below 65%.

Participation in upsides: Despite focusing on relative stability, balanced advantage funds do not shy away from raising equity allocation during market rallies. This allows investors to benefit from upward moves while staying invested.

Risk-adjusted returns: Active rebalancing between assets classes aims to generate reasonable returns but with relatively lower volatility. Over time, this enhances risk-adjusted returns.

Flexibility of mandate: The flexibility to quickly shift between assets based on changing market conditions gives fund managers strong downside mitigation tools. This adds an extra layer of stability relative to static allocation funds.

Diversification benefits:

Investing across small, mid, and large cap stocks as well as high quality corporate bonds results in a well-diversified portfolio within one mutual fund scheme.

Benefits of balanced advantage funds

Balanced advantage funds deploy a proactive asset allocation strategy that can meaningfully improve risk-adjusted returns. Here is a brief overview of their process:

Dynamic mandate: SEBI regulations permit these funds to invest in stocks and in debt/cash. This allows agile rebalancing wherein in certain market conditions the net equity can go below 65% by using equity derivatives to hedge the portfolio while ensuring the scheme has fulfilled equity taxation elements.

Market evaluation: Fund managers continually assess macroeconomic trends, valuations, demand-supply factors, interest rate movements and other variables to gauge market direction.

Asset allocation call: Based on research, the fund can increase equity exposure during bull markets/rallies. Conversely, it can raise debt/cash allocation during corrections/bear phases.

Portfolio construction: Stocks are picked from a wide spread of large, mid and small cap companies across sectors. Debt investments include quality corporate bonds/gilt funds across maturities and credit ratings.

Ongoing monitoring: Portfolio is actively reviewed and rebalanced back to targeted allocation on interim basis depending on market conditions, with the primary focus on risk management.

By leveraging this flexible approach, balanced advantage funds aim to deliver a reasonable return potential with relatively lower volatility compared to pure equity funds.

Factors to consider when investing in balanced advantage funds

Fund manager credentials: Experienced, process-driven fund managers who have successfully navigated past downturns instill more faith.

Portfolio analysis: Understand the current asset allocation and past rebalancing decisions to assess risk management ability.

Fund size: A bigger AUM ensures adequate portfolio diversification.

Risk profile: Match the fund's volatility to your risk tolerance and time horizon for the investment.

By prioritising these factors, investors can select a balanced advantage fund that suits their financial goals while bringing relative stability to the overall portfolio.

Conclusion

Balanced advantage funds present a thoughtful solution for Indian investors seeking optimal risk-adjusted returns. Their dynamic mandates aim to participate in equity upsides and provide a cushion during downward cycles through proactive asset allocation. By considering past performance trends, fund manager expertise, costs and other criteria, investors can benefit from the relative stability and growth potential these schemes offer. If you want a well-managed balanced fund that provides long term relative stability and growth potential through dynamic equity-debt allocation, you can consider investing in the Bajaj Finserv Balanced Advantage Fund. For a detailed scheme information, click here.

FAQs:

What is the ideal time horizon for investing in balanced advantage funds?
A. The ideal time horizon to invest in balanced advantage funds is said to be 5 years or more. Since these funds dynamically allocate between equity and debt, they aim to generate a return potential comparable to equity over the long run but with lower volatility.

How do balanced advantage funds differ from other types of mutual funds?
A. Balanced advantage funds are different from other mutual funds as they can dynamically shift asset allocation based on market conditions within a defined band rather than maintain a fixed allocation. This gives them flexibility to take defensive or aggressive positions depending on the situation.

Can balanced advantage funds guarantee returns or prevent losses?
A. No, balanced advantage funds cannot guarantee returns since market conditions can unpredictably impact performance. They also cannot fully shield investors against losses as they have an equity component that is subject to volatility. However, balanced advantage funds try to mitigate downsides through dynamic risk management.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.< /br> 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