Balanced Advantage Funds : Asset allocation plays the most important and major role in the presentation of any investor’s portfolio. Studies show that other decisions such as stock selection and market timing for the portfolio play a smaller role than asset allocation. This is why asset allocation strategies help investors avoid any confusion or biases they may face while investing. Read on to know the role of Balanced Advantage Fund in better asset allocation and the benefits it provides. Abhishek Tiwari, Executive Director & Chief Business Officer, PGIM India Mutual Fund has given the detailed information.
Predicting the market cannot prove to be correct all the time, we can say that it is unpredictable. Similarly, deciding on active asset allocation can be a difficult task for any investor. Actually, fluctuations in the stock market can confuse investors. When the market falls, they fear their investment will sink, while when the market rises, they are worried about profit booking. In such a situation, an easy way to manage asset allocation can be to consider investing in Balanced Advantage Funds (BAFs) or Dynamic Asset Allocation Funds.
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Governed by a strong model
What makes Balanced Advantage Funds special is that they are governed by a model that is transparent and determines the allocation to equity/debt based on the perceived risk in the market. Balanced Advantage Funds allocate funds to equity and fixed income based on the allocation suggested by this model. Hence, any confusion in investing is automatically eliminated while the intervention of the fund manager is limited to stock selection.
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How do BAFs work?
Balanced Advantage Funds typically follow a P/E based variance asset allocation filter, which automatically recommends asset allocation decisions across equity and debt in different market phases. The asset allocation across equity and debt is managed dynamically based on market valuations, which helps in making 2 important decisions:
Increasing exposure to equities:When equity market valuations are low, i.e. current P/E is significantly lower than the historical average, the model recommends increasing allocation to equities. As a result, exposure to debt is reduced.
Reducing exposure to equities:When the equity market valuations are elevated, i.e. the current P/E is significantly higher than the historical average, the model recommends reducing allocation to equities. As a result, the debt exposure increases.
Apart from PE, balanced advantage funds can use other filters and macro-economic indicators to take an active call on asset allocation. The fund strategy may vary across fund houses. Equity allocation is diversified across sectors and themes, providing adequate diversification to investors.
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Benefits of Balanced Advantage Funds
1. Asset Allocation: You don’t have to worry about changing your equity and debt allocation as the fund takes this decision on your behalf.
2. Low risk : These funds invest in both equity and debt, so the balanced allocation provides downside protection when the equity market falls.
3. Tax-efficient: Balanced advantage funds typically keep equity exposure at 65 per cent, which helps these funds qualify for equity taxation.
4. Diversification:These funds have the freedom to invest in stocks of large cap, mid cap and small cap companies based on different themes and sectors.
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5. Flexibility :You can start a SIP or make a lump sum investment in a Balanced Advantage Fund. The minimum investment amount may vary from fund house to fund house.
6. Withdrawal: If you want to benefit from the wealth creation potential of equities and at the same time do not want to take market risk when you need regular cash flow, you can make a lump sum investment in a Balanced Advantage Fund and start a Systematic Withdrawal Plan (SWP).
7. Wealth Creation: Equity as an asset class has the potential to beat inflation in the long term and a long-term investment goal can help you grow your wealth by generating better returns.
8. Protection from wrong decisions: A market crash can be disturbing for many investors, making them very vulnerable to withdrawing their investments or making new investments. The automatic asset allocation model of a Balanced Advantage Fund helps you eliminate this confusion and reap the benefits of long-term compounding.
(Disclaimer : Investors should note that Balanced Advantage Funds are not completely immune to volatility as they invest in equities. Investors should consult their financial advisor to assess their risk appetite before investing.)
