Balanced Advantage Funds: 5 things to know before investing in them

view original post

© Provided by The Financial Express For existing investors in equity mutual fund schemes or new investors who are jittery looking at the current market levels but at the same do not want to lose out on any further rise in stocks hereon, BAFs may be worth investing in.

Balanced Advantage Funds or popularly known as BAFs are equity mutual fund schemes with a dynamic asset allocation strategy. Depending on the equity valuations, such funds can increase exposure to 80% in stocks while the minimum threshold to stock exposure is 30%. The rest is invested in debt securities. With an inbuilt re-balancing strategy, BAFs sell stocks in their portfolio when valuations are high and do the opposite when markets crack. Such a quick, effective, and conservative investment strategy helps the investor handle the market volatility quite comfortably. Thus, investors get the optimum benefits of both asset classes – debt and equity.

At a time when equity valuations are not cheap with key indices trading at an all-time high, a Balanced Advantage Fund could be a good choice. These funds not only reduce the downside when markets fall but also help investors make the most of a full market cycle. For existing investors in equity mutual fund schemes or new investors who are jittery looking at the current market levels but at the same do not want to lose out on any further rise in stocks hereon, BAFs may be worth investing in.

Here are the 5 things to know about BAF before you consider them for investing.

Dynamic Allocation

A Balanced Advantage Fund does not have the restriction of a pure balanced fund which has a set limit of 65-70% in equity and the rest in debt. BAFs can dynamically change their asset allocation based on the daily equity valuation. With investment freedom to allocate as high as 80% in equity and 30% on the lower side, BAFs can drastically cut or raise their exposure to debt as well as equity given the prevailing valuations. This helps the BAF category to offer a better mix of returns in the long-term and thus beat not only inflation but yield a much better return than a typical debt or balanced fund.

Stable Growth In Investments

With the ability to reduce the downside in investment valuation in times of decline in markets, returns generated by BAFs are far more stable than a pure equity fund. This keeps the worries of investors aside and helps in the wealth creation journey. It is worth highlighting that during phases when returns from key indices are negligible, a dynamic asset allocation strategy tends to outperform the indices by a wide margin.

Deals With Market Volatility

Markets are volatile. A volatility-driven market makes investors wary and often they end up making mistakes. It’s a fact that most investors are unable to buy low and sell high. This deprives them of making the most of the volatility in the market. BAFs, on the other hand, use market volatility as a growth tool in their favour to create wealth. The fund’s in-built feature of dynamic asset allocation enables the scheme to effectively manage volatility while buying stocks when they have a low valuation and selling them when stocks are at higher levels. Such a unique design of its fund management processes effectively takes care of the greed and fear factor among investors.

Valuation Strategy

Against the normal practice of valuing the stocks on the price to earnings (P/E) basis, BAFs take price to book (P/B) as their valuation model while selecting stocks. Financial experts point out that the P/B model is comparatively less volatile against the P/E strategy. With the P/B model, BAFs are relatively better placed when it comes to estimating the intrinsic value of the companies which form the portfolio of the scheme. It is worth explaining that book value is a balance sheet item and thus more dependable when it comes to investment.

Diversification

Like any equity mutual fund, BAFs too have diversified portfolios spread across large-cap and mid-cap stocks. With such a blend of stock composition, these funds tend to have the stability of large and established companies while at the same time offering the tremendous growth potential of mid-sized companies. A diversified investment portfolio does not let concentration risks ruin wealth creation and help offer investors a risk-adjusted return.

Currently, investors are increasingly becoming fearful of any market crash. However, letting panic-based decisions overshadow your wealth journey could be far more damaging. Existing investors may consider shifting their assets in BAFs to avoid any unwanted jerk due to market fall. Investors on the sidelines waiting for market correction can also opt for BAFs either through the SIP mode, lump-sum, or a mix of both.

(The author is CEO, Bankbazaar.com)

Related Posts