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Balanced Advantage Funds—All You Need To Know

Balanced Advantage Funds or Dynamic Asset Allocation Funds: All You Need To Know

Balanced Advantage Funds—All You Need To Know

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Financial markets are known to be quite unpredictable—and we are currently experiencing one such period where we are witnessing volatility as markets respond to global cues—the war in Ukraine, oil prices, or inflation in the US. Investing your hard-earned money in complex market situations needs a deep amount of understanding and strategic planning.

One of the most popular investment strategies is Asset Allocation, which follows the underlying principles of a balanced diet—a healthy metabolism calls for the right balance of nutrients like carbs, proteins, minerals, fats, etc. Similarly, one way to maintain a healthy investment portfolio is to diversify the asset classes you invest in.

One of the leading strategies pertaining to asset allocation is Dynamic Asset Allocation, or Balanced Advantage Funds. The idea here is to dynamically adapt your allocation of two asset classes—debt and equity—based on market conditions.

What is a Balanced Advantage Fund?

A Balanced Advantage Fund deals with the dance of two premier asset classes, debt and equity, according to the tunes being played in the markets. Imagine you’re manning mission control for a rocket and your job is to stay on course for the objective: the moon. You have a set trajectory you want to follow, but you have to maintain the right balance between your main engine (debt allocation) and thrusters (equity allocation), or else you will miss your target.

Depending on the scale of market fluctuations (from minor space debris to major asteroids), you alter your path by manipulating either debt or equity allocations (engines or thrusters) and recalibrating your journey to your financial goals (the moon).

Asset management companies or fund managers use complex mathematical models to decide equity and debt allocation, based on the market, to maximise returns on investment. These models and investment strategies are thoroughly tested by fund managers to ensure that the primary objectives of the fund can be met.

To avoid interference on your course to the moon, you can either take the shorter route through the debris or take a longer route around it.

The counter-cyclical model entails the former, increasing equity allocation and reducing debt allocation in declining markets and vice versa. The idea is to buy cheap and sell big. The scale of the model, of course, derives from different valuation metrics like Price to Earning (P/E) ratio, Price to Book (P/B) ratio, etc.

A pro-cyclical model calls for an approach that fundamentally mirrors the market trends i.e., increasing equity allocation and decreasing debt allocation in rising markets and the opposite for a falling one. These models rely on market trend indicators like daily moving averages and the measure of the health of a trend (standard deviation, downside deviation, etc.).

Advantages of a Balanced Advantage Fund

In markets that are volatile and face unpredictable fluctuations, Balanced Advantage Funds can be quite advantageous.

● A balanced advantage fund allows you to move between an equity-based or a debt-based allocation model, independent of time. This is called asset rebalancing.

● A balanced advantage fund allows a regular income stream with a Systematic Withdrawal Plan or SWP.

● Dynamic asset allocation also protects your investments from falling during a falling equity market, while gaining from upsides in a bull market.

● It allows you to overcome investment biases during a volatile market and stay disciplined, improving your odds.

● Since balanced advantage funds are taxed as equity funds, you are more likely to gain from tax-efficient returns with this strategy.

Know before you invest in a Balanced Advantage Fund

Though dynamic asset allocation can help you reduce your losses, there are some aspects that you need to consider before opting for it.

Longer Investment Horizon: Owing to the equity holdings in the portfolio, this strategy may yield negative returns in the near term. This means investors in these funds should ideally have an investment horizon of at least three years or more.

Risk: These funds are not completely risk-averse, despite a sizable chunk of assets being invested in debt securities. Equity components may expose balanced advantage funds to equity market risks, but they are still considerably less risky than pure equity funds.

Returns: The returns with this strategy are not likely to be higher than those of pure equity funds, but they may be higher than those of fixed-income funds. A relatively aggressive investor with an investment horizon of three to five years is best placed to see positive outcomes.

Goals: Balanced Advantage Funds are ideal for those looking for a low-risk, long-term investment as they have the potential to provide relatively positive returns over a period of time as well as deliver tax efficiency.

None of us can predict with certainty what the shape of the market is going to look like in the future. We don’t know what a person like Elon Musk is going to do next and how his tweets might move markets, and we don’t know all the potential hazards of going to the moon until we’re actually out there in space. The essence of stock market investments involves finding the right balance between asset classes in unpredictable market conditions, and a Balanced Advantage Fund is a great vehicle on an exciting investment journey.

Disclaimer: An Investor Education and Awareness Initiative by Mirae Asset Mutual Fund

All Mutual Fund investors have to go through a one-time KYC (Know Your Customer) process. Investors should deal only with Registered Mutual Funds (RMF). For further information on KYC, RMFs and procedure to lodge a complaint in case of any grievance, you may refer the Knowledge Centre section available on the website of Mirae Asset Mutual Fund.

Mutual fund investments are subject to market risks, read all scheme related documents carefully.