Amid global geopolitical tensions, rising interest rate cycles, and inflation, ‘volatility’ is the only constant thing in the financial markets. In this highly uncertain world, investors often struggle with a common question: when is the right time to invest?
Timing the market may not always be easy for even seasoned investors, as uncertainty can drive decisions heavily influenced by emotions. This is when balanced advantage funds come as a smart choice. As the name implies, these funds balance the risk by dynamically investing in both equity and debt, helping you navigate the market uncertainties.
What are Balanced Advantage Funds?
Balanced advantage funds are also referred to as hybrid mutual funds or dynamic asset allocation funds that actively shift their allocation between equities and debt securities depending on the market conditions.
These funds fall under the ‘hybrid’ category as per the SEBI (Securities and Exchange Board of India) classification. These funds have the flexibility to adjust the asset allocation based on market risks and valuations. For example, a fund may reduce the equity exposure when the market looks expensive and increase the equity exposure when the market looks lucrative. This makes it an appealing choice for investors during a volatile market cycle.
How Do Balanced Advantage Funds Work?
Balanced advantage funds rely on a valuation-based and model-driven approach to allocation strategy. Let us explore how it works:
1. Valuation-Based Allocation
Balanced advantage funds take a valuation-based approach to asset allocation. Generally, fund managers use various metrics like Price-to-Book (P/B) ratio, Profit-to-Earnings (P/E) ratio and Earnings Yield to understand the valuations. When valuations are high, the fund reduces equity exposure and increases it during an upward trend.
2. Use of Hedging and Arbitrage
Many balanced advantage funds use futures and options to hedge the equity exposure, which helps to reduce the actual market risk and maintain higher gross equity to boost tax efficiency.
Market-Driven Asset Allocation
Fund manager shifts the asset allocation based on the market conditions. Here are the examples to show the allocation strategy in different market conditions:
| Market Conditions | Equity Allocation | Debt Allocation |
| Bullish market | 30% to 40% | 60% to 70% |
| Fair valuation | 50% to 60% | 40% to 50% |
| Bearish market | 70% to 80% | 20% to 30% |
Why the Balanced Advantage Fund Works Well in Volatile Markets?
Balanced advantage funds are mainly designed to handle the uncertainties in the market and balance the risk-return for investors. Here are the reasons why a balanced advantage fund works well in a volatile market:
1. Lower Downside Risk
During a market downturn, these funds reduce the equity exposure and invest in debt securities. This limits the losses and reduces the downside risk of the portfolio.
2. Capitalise Market Corrections
When the market starts to move upward, a balanced advantage fund increases its equity exposure, capitalising on the valuations for better long-term growth.
3. Reduces Emotion-Driven Decisions
You don’t need to worry about timing the market as the fund manager rebalances the portfolio based on market conditions. For example, while the market starts to correct, the fund gradually invests in equities at a lower price to benefit the investor for long-term wealth creation.
Key Benefits of Balanced Advantage Funds
The following are the key benefits of the balanced advantage funds:
1. Automatic Rebalancing
The balanced advantage fund automatically adjusts the allocation based on the market conditions on a continuous basis.
2. Lower Volatility
Balanced advantage funds are relatively less volatile in comparison to pure equity funds, which makes them a suitable option for risk-conscious investors.
3. Tax Efficiency
Most balanced advantage funds maintain an equity exposure of more than 65%, which qualifies them for equity taxation. This offers tax efficiency to the investors. Here are the applicable capital gain taxes:
- Short-term capital gain tax (holdings less than 12 months)- 20% + applicable surcharge & cess
- Long-term capital gain tax (holdings more than 12 months) – 12.5% on gains above INR 1.25 lakhs in a financial year
Suitable for Both SIP and Lump Sum
The fund is suitable for any mode of investment, a systematic investment plan (SIP) and a lump sum. When you invest through SIP, you can get the benefit through disciplined investing, and when you use the lump sum mode, you get the dynamic allocation benefits.
Popular Balanced Advantage Funds in India
Many asset management companies offer balanced advantage funds with various investing strategies and allocation models.
For example, the HDFC Balanced Advantage Fund is designed to offer long-term capital appreciation by following the dynamic asset allocation strategy. It is one of the large-sized balanced advantage funds that is known for consistent performance and lower downside risk. Here are some of the well-known balanced advantage funds in India with their last 3- and 5-year performance:
| Fund Name | 3-year return | 5-year return |
| HDFC Balanced Advantage Fund | 14.51% | 15.81% |
| ICICI Prudential Balanced Advantage Fund | 11.26% | 10.48% |
| Axis Balanced Advantage Fund | 12.41% | 9.74% |
| Kotak Balanced Advantage Fund | 11.58% | 8.21% |
Source: Ace MF, ET Money
Risks Associated with BAFs You Should Know About
Balanced advantage funds are not risk-free as they are linked to the market. The following risks must be considered while investing:
- In a bullish market, BAFs may underperform as they automatically reduce equity exposure.
- These funds take a valuation-based and model-driven approach, which may impact performance if the model fails to capture the market dynamics.
- Though hedging reduces risk to a certain extent, BAFs are not risk-free and can be impacted by short-term fluctuations.
Who Should Invest in Balanced Advantage Funds?
The BAFs are suitable for the following investors:
- Beginner investors who prefer hands-free portfolio management can invest in BAFs as they get the benefit of dynamic allocation and reduced volatility.
- Conservative investors seeking a balance between growth and stability
- Investors with a medium-term investment horizon, say 3 to 5 years, can consider BAFs
- Suitable for lump sum investors as they can invest a large corpus without a worry to time the market. It is also suitable for SIP investors.
When Should You Consider Investing in Balanced Advantage Funds?
Here are the scenarios in which you can consider investing in BAFs:
- During economic transitions and global uncertainty, BAFs help manage the risk
- In a bearish market, to benefit from lower downside risk
- When you are planning to invest a lump sum, BAFs allow gradual allocation into equity, helping you benefit from dynamic allocation
Conclusion
To sum up, balanced advantage funds are a practical solution for many investors who struggle to time the market and prefer hands-free portfolio management. With dynamic allocation into equities and debt securities, they offer investors a good blend of growth potential and lower downside risk.
In short, BAFs help you ‘’time the market without trying to time it.’’
If you are seeking a balanced outlook between stability offered by debt funds and growth offered by equity funds, hybrid funds can be an excellent choice. These funds work well in a volatile market by adding both growth and stability to your portfolio.