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Balanced Advantage Fund

Balanced Advantage Fund is in the talks again among investors. Ever since the disaster of March 2020, the BSE Sensex has given a 103% return. Moreover, the rally is going strong. These funds can be of great help in the current times as they lower the equity allocation when the market valuation is high and raise it when it corrects.

We thus simplify this for our readers in this article. Let's begin!

Balanced Advantage Fund

Balanced advantage funds follow the dynamic asset allocation strategy. Moreover, they are consequently a sub-type of hybrid funds that invest in multiple asset classes like equity, debt, gold, etc.

Also, as per the SEBI rules, BAF can invest from 0 to 100% in equity and from 0 to 100% in debt as per their asset allocation setup.

These allocations can subsequently change subject to market conditions.

What Is Asset Allocation?

Asset allocation subsequently suggests the diversification of the portfolio across different asset classes, like, equity, debt, gold, real estate, etc.

Moreover, various assets classes have different risk-return profiles.

There is thus a low to negative correlation of the returns of different asset classes in various market conditions.

Asset allocation thus aims to balance the risk and returns.

 

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Asset Allocation Strategy For Balanced Advantage Fund

BAF follow the 3 popular options,

1. Strategic asset allocation: This strategy is subsequently based on targeted allocation for various asset classes.

Also, timely rebalancing (as per target) consequently stabilizes the portfolio.

Moreover, hybrid asset allocation options have flexibility in managing it within the ranges mentioned in the Scheme Information Document like equity 65% to 80% and debt 20% to 35%.

Fund managers thus stick to these target allocations, regardless of market conditions.

2. Dynamic asset allocation: In such a strategy, the fund manager continuously adjusts the portfolio as per market conditions i.e. he will either increase or decrease the allocation in equity and fixed income based on market movements.

He will thus follow a dynamic asset allocation model to achieve it.

The performance of these models is consequently based on back-testing for various market situations.

3. Tactical asset allocation: It is thus a kind of asset allocation strategy, whereby the investor can deviate from the core model of the plan, and make use of the market opportunities.

Moreover, this requires market timing and investment knowledge.

Features of Asset Allocation For Balanced Advantage Fund

1. Firstly, dynamic asset allocation has minimum volatility and downside problems in comparison to strategic asset allocation for high equity allocation.

2. Secondly, the advantage of a Systematic process-driven approach as compared to a biased decision based on gut feelings.

3. Thirdly, the potential to subsequently get higher returns based on sound allocation strategy.

4. Finally, strategic asset allocation consequently gives better returns versus dynamic asset allocation in bull market situations.

Types of Asset Allocation Models For Balanced Advantage Fund

These are thus classified into two types,

1. Counter-cyclical dynamic asset allocation:

It thus follows the theory of buying low and sell high.

Moreover, this plan increases the equity allocation when equity declines(when it is cheaper) and sells it when the equity market rises.

Fund managers subsequently use various metrics in this plan such as P/E or P/B ratios to judge the asset allocations.

It is thus the most popular model for Balanced advantage funds.

2. Pro-cyclical dynamic asset allocation:

This model thus helps to absorb the upside during the bull market and the downside in a bear market.

Moreover, the funds of such a model invest in a rising market and sell in a declining market.

They are consequently based on market trend indicators and may use macroeconomic factors.

Top 5 Balanced Advantage Funds in India

Here is a list of Top 5 Balanced Advantage Funds in India 2021,

Fund Name Returns
1 Yr3 Yr5 Yr7 Yr10 Yr
Edelweiss Balanced Advantage Fund35.9713.7212.5511.5011.23
L&T Balanced Advantage
Fund
17.598.338.348.7611.26
IDFC Dynamic Equity Fund23.369.689.42--
ICICI Prudential Balanced Advantage Fund31.0211.4910.9911.0512.46
DSP Dynamic Asset Allocation Fund20.2310.529.388.76-

Who should invest in Balanced Advantage Funds?

BAF is thus best suited for,

1. Investors who subsequently seek capital appreciation and income from long-term investments.

2. Investors who thus wish to have minimal risks in a volatile market.

3. Those with an investment duration of 3 to 5 years.

4. People who have a very good understanding of the dynamic asset allocation process.

Different Combinations in Such Funds

 

Net or Active EquityFixed IncomeArbitrage
Firstly, it is a non-hedged equity component of the fund.Determined thus by asset allocation model.It is thus the fully hedged component, not exposed to market risks.
Secondly, a market-based quantitative dynamic asset allocation model.However, it is capped at 35% to thus enable equity taxation.Consequently, generates arbitrage profits as per price difference in cash and futures market.

Conclusion

BAF is a wise investment option for those investors who are thus looking for a long-term horizon.

Moreover, it involves a variety of methods like strategic asset allocation and dynamic asset allocation and works on counter-cyclical and pro-cyclical allocation models.

However, one must consequently think through this option and know how it works before commencing the investment. Happy investing!

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