Why You Shouldn’t Judge Balanced Advantage Funds By Near-Term Performance

One of the options for investors to manage the debt and equity mix in their portfolios is to give the responsibility of the exact mix and the changes to be made to the fund manager. This solves the problem of actually deciding when one should be equity- or debt-heavy.

Choosing a mutual fund that does this is an easy option, but it is important to see what strategy the fund manager is following. This is because the strategies employed by fund houses vary dramatically.

There is a category of funds where the investors can achieve this objective, and this is the Balance Advantage Fund category.

Here, the fund manager decides to change the exposure between debt and equity, and hence, the responsibility of managing this task shifts from the investor. There is also the option of holding some amount in cash that can be decided by the fund manager, so this becomes another choice in the investment mix.

Fund managers make a call based on their specific strategy and market factors, and this becomes the factor to watch.

One of the ways in which investors make their investments in mutual funds is to look at the portfolio and then determine the potential of the portfolio holdings. The expectations are then built on the returns that the holdings might generate and the quality of the existing holdings.

This approach might not be the best way to look at Balanced Advantage Funds because the exposure to the holdings in the portfolio can change quickly. This might make the entire exercise of evaluation irrelevant. Even the overall exposure of the debt and equity mix can change in a short period of time.

This, again, becomes a significant point that the investor should factor in because it is not necessary that past trends will be followed by the fund manager going forward.

There is also the issue of cash calls, which the fund manager may follow. There is a huge variation in this, which changes the entire exposure and consequently, the return of the fund.

Some fund managers do not prefer to keep large amounts in cash, so they move the amounts that they do not want in equities towards debt, with only a small amount meant to service the redemption going towards cash.

On the other hand, several fund managers keep a large part of the portfolio in cash for an extended period of time, until they are comfortable making a decision to go into a particular asset class.

The cash component can affect the overall return of the fund, and this needs to be considered. Neither of the strategies is good or bad; it’s just that the market conditions can make it look like a success or failure for a short period of time.

The final analysis is that the investor should rely on the fund manager to deliver the returns on a consistent basis and not worry about the kind of exposure that is currently there. This can change pretty quickly as the fund manager takes a call.

Thus, investors should not be overly disappointed by short-term performance. Understanding the nature of the investment and the way in which it is being managed will enable them to get the full benefit of this category of funds.