WHY CHOOSE ALL-WEATHER FUNDS
Balanced Advantage Funds are a class apart and come in handy for all types of investors for the dynamic asset allocation model they follow
The hybrid fund category, as prescribed by the market regulator SEBI, follows a pattern where the funds need to maintain an allocation to equity and debt in varied combinations. Among them, the Balanced Advantage Funds or Dynamic Asset Allocation Funds, as they are popularly known, stand out because of the periodic rebalancing of these funds’ portfolios depending on prevalent market conditions. The asset allocation between equity and debt is also aided by arbitrage opportunities and derivative instruments as a risk-hedging mechanism as stated in specific fund’s objective.
Most Balanced Advantage Funds invest 65-80 per cent of the asset in equities based on the fund’s stated objective and the strategy adopted by the AMC (asset management company) running the fund. The dynamic allocation is based on a model that is stated in the fund’s objective and SID (scheme information document). This model varies across AMCs and hence each Balanced Advantage Fund is different in the way it is structured and managed. For instance, some may have a valuation matrix that decides the allocation to equity, while some may base the allocation based on the index levels to decide on the equity allocation. Likewise, some may take arbitrage as a strategy to manage.
Importantly, these funds can allocate and reallocate between asset classes dynamically depending on the changing market scenario. In effect, the overall portfolio stands to benefit from gains in equity, while returns are stable because of allocation to debt. As the market goes through a full cycle, investments in this fund offer a better mix of returns that can beat inflation in the long term by easing the downside of equity markets. In effect, these funds are suitable investment options in any market scenario.
FUND DYNAMICS
While one could sub-categorise these funds based on the average equity allocation different funds maintain, that doesn’t do justice to the strategies adopted by the wide range of funds in this category. One set of funds follows the strategy of ‘buy high and sell higher’ by catching the trend. However, this type does face the risk of a significant drop when the markets fall, which could result in an erosion of up to 10 per cent in a short period. At the same time, as this approach does chase trends, it makes up for the short-term fall with a rebound when the markets go up.
A second strategy is based on a contrarian belief. Such funds reduce their equity allocation when the markets reach their peak and start increasing the equity allocation when the markets start to fall. This approach makes funds following this strategy less volatile and is suitable for investors willing to take a medium level of risk. The last type of balanced advantage fund follows a high equity allocation and adopts the arbitrage strategy to make up for any lowering in its equity allocation.
Such is the popularity of the Dynamic Asset Allocation Funds category that among hybrids, they account for high assets that are managed by AMCs. The return posted by the category is favourable, but it varies
INVESTING IN BALANCED ADVANTAGE FUNDS CAN BEAT INFLATION IN THE LONG TERM, MAKING THEM A SUITABLE INVESTMENT OPTION IN ANY MARKET SCENARIO
across the available funds because of the different strategies adopted by each one of them. As investors, it would be in your interest to understand the strategy adopted by a specific fund before investing in them and have a minimum 3-5-year investment time frame when investing in this category.
ADVANTAGE INVESTORS
For new investors, there is always the fear of the market downs and ups—they are worried and unsure of which fund to invest in. The Balanced Advantage Funds are a good starting point for new investors. These funds follow the first principle of investing—buy low and sell high. However, not every investor can follow this rule on their own and needs to be guided and assisted in investing, keeping emotions in check. Dynamic Asset Allocation Funds help investors tame their emotions and aid them in weathering market cycles with a steady performance over different market cycles.
As for seasoned investors, allocation to Balanced Advantage Funds can form a significant part of their portfolio, with other categories of funds playing the role of tactical allocation. The Dynamic Asset Allocation and rebalancing principle followed by these funds make them a suitable fund for steady, risk-adjusted returns over different market cycles. So, market downturns hit their performance less than the benchmarks, while the upside is significantly more when the markets go up.
Like any other mutual fund investment, investing in a Balanced Advantage Fund is also not a one-time buy-and-forget rule. You need to understand how each of the funds fares in a full cycle and which one suits your individual needs and financial goals. The upside of these funds is, of course, the decision on when to go up on equities and when to reduce it—something that seasoned fund managers can do better than small investors.
Invest in this category of hybrid fund to maintain a steady portfolio return and, for those willing to learn, it could be a great experience to know why and how much allocation a fund does and its impact on the fund’s performance compared to the benchmark. As small investors, one looks to invest in instruments that post steady returns and are able to check the falls when the markets tank. The Dynamic Asset Allocation Funds have the potential to address this specific investor need and it is a favourable fund scheme to have investments in. ■
DYNAMIC ASSET ALLOCATION FUNDS CHECK THE FALL IN THEIR RETURNS WHEN THE MARKETS FALL, BUT STAND TO GAIN MORE WHEN THE MARKETS SURGE, MAKING THEM SUITABLE FOR ALL TYPES OF INVESTORS