As per the Securities and Exchange Board of India (SEBI), a sort of hybrid mutual fund scheme is the Balanced Advantage Fund, commonly known as Dynamic Asset Allocation Fund. These funds’ asset allocation is continually changing in response to market prices and conditions, and they invest in asset classes like equity and debt.
These mutual funds make an effort to maintain exposure to equity derivatives in order to implement hedging methods and effectively eliminate human biases from the investment decision-making process. Equity investments give market-linked profits while debt products offer fixed returns. Your money shifts to debt instruments when the markets are strong because the fund can alter its allocation between the two asset classes in response to shifting market prices. On the other hand, even when stock prices decline, debt instruments continue to generate revenue.
Who should make an investment?
All different kinds of Long Term Investors including the newbies entering the market can benefit greatly from Balanced Advantage Fund due to its numerous advantages. Do invest in balanced advantage fund if any of the below-mentioned features define you.
- Investors seeking a more aggressive option than only debt funds.
- Investors seeking a better rate of return on their equity investments but also limiting their potential losses should the markets decline.
- Investors looking to lower risk should diversify their holdings and leave asset allocation to a professional.
- Investors in mutual funds for the first time seeking a long-term avenue for wealth creation
- Also, risk-averse individuals who are approaching retirement (within 5-7 years) may also engage in a balanced advantage fund.
Advantages of BAFs
- Growth in Equity: An equity exposure managed by a balanced advantage fund typically ranges from 30% to 80%, depending on market conditions and the price-earnings ratio. DAA investors offer largely in equities and other equity-related instruments to encourage long-term capital growth. It leads to greater wealth development and makes it possible for investors to outperform current inflation by investing in shares.
- Portfolio diversification: You can invest in pure equities and manage debt assets at the same time by taking advantage of arbitrage possibilities and equity derivatives methods with a balanced advantage fund. The product’s blend of debt, arbitrage, and equity makes it best suited for saving for retirement and allowing it to grow even in stagnant markets. After considering your risk tolerance, you can also combine the strategy with debt and large investors to further diversify your holdings.
- Lower risks: You can choose to limit your exposure to stock and debt by taking some profits and investing in debt instruments when the equity market becomes unstable by investing in a balanced advantage fund, which allows you to maximize your exposure to both. On the other side, a fund manager can pick stocks carefully, expanding his exposure to equities, and holding them for a long time, giving investors a return that is multiplied. This is possible when the market is properly priced and stocks are trading at good valuations.
- Consistent and Stable Returns: Despite having better returns than other funds, equities funds’ primary negative is their extremely variable returns. In other words, balanced funds often provide stable and consistent returns over a long period of time, but the returns on equity funds may vary.
A balanced benefit fund is the best option for you if you’re a novice investor hesitant to endure the current market volatility. You can use these asset allocation funds as risk-adjusted solutions, yes. You can diversify your portfolio by investing in debt instruments, as well as generating income with fewer equity risks. The behavior of and the fund management should therefore be examined by investors considering the performance of the markets in the past and the fund manager’s capital allocation strategy to optimize return and minimize risk. Always remember to make wise investment choices and invest the right amount in accordance with your objectives and risk tolerance.