Is It Good To Invest In A Balanced Advantage fund? (2024)

The golden rule to get the best returns is ‘buy low and sell high’. But it’s not easy to practise this in real life. Why? Because human emotional biases lead to greed-buying when markets are high and fear-selling when markets are low. Fortunately, there is one category of mutual funds that eliminates the guesswork for investors: balanced advantage funds (BAFs).

Also known as dynamic asset allocation funds (DAAF), these use a predefined investment model to dynamically manage their equity and debt allocations according to market conditions. This reduces the risk of emotional biases on the part of the fund manager. But how do these funds really work?

How Do Balanced Advantage Funds Work?

Balanced advantage funds allocate their investments across a mix of equity, arbitrage, and fixed-income options. They aim to earn higher returns from equities while balancing the risk by investing in debt when equity valuations are not favourable. These funds dynamically manage their asset allocation based on market conditions. The shift between equity and debt is determined by the asset-allocation strategy that they follow.

For investors, it is important to understand the fund’s strategy before zeroing in on a fund.

Strategies Followed By Balanced Advantage Funds

Boardly, there are two asset-allocation strategies that balanced advantage funds follow: counter-cyclical and pro-cyclical. Most of the funds adopt the counter-cyclical strategy. This strategy uses valuation metrics such as price to earnings (P/E), price to book value (P/B), or a blend of both to determine the equity allocation.

Let’s look at the different asset-allocation strategies and valuation metrics used by the top 5 balanced advantage funds (by AUM) that have existed for over 5 years.

**AUM as on Mar 3, 2023.

Under the counter-cyclical strategy, the fund decreases the allocation to equity when the market valuations are high and allocates more to equity when the market valuations are low. The equity exposure is thus dynamically managed and increased when valuation metrics are favourable or brought down when they are not.

Some funds also use the pro-cyclical strategy. Edelweiss Balanced Advantage Fund is a classic example. Under this strategy, the fund increases its equity allocation in a rising market and reduces it in a falling market. The reason behind this is that the fund aims to capture the upside during the bull market and contain the downside in bear markets.

How Have Balanced Advantage Funds Performed?

The promise of balanced advantage funds lies in containing the downside during bear markets while also participating in bull runs. Have they been able to live up to their promise? Let’s find out.

We compared the category returns of balanced advantage funds with those of the NIFTY 50 for the past 40 quarters (10 years; from quarter ended March 2013 to quarter ended Dec 2022). Out of the 40 quarters, the NIFTY 50 fell in 12 quarters. Out of those 12 quarters we have ignored the quarter ending March 2013 as return data of only one balanced advantage fund is available for that quarter. In all the remaining 11 quarters, the balanced advantage category fell less than the NIFTY 50. In return terms, NIFTY 50 had an average return of -16.99% during those 12 quarters, against -8.27% by balanced advantage funds.

The chart below shows the returns in the quarters where NIFTY 50 had negative returns.

Now, let’s see how these funds performed in a rising market. In the same 40 quarters, the NIFTY 50 gave positive returns in 28 quarters and balanced advantage funds gave positive returns in all of them. While the NIFTY 50’s average returns in these 28 quarters stood at 34.69%, balanced advantage funds also managed to generate a decent 23.03%.

Thus, they offered good downside protection in falling markets while also participating in the upside. This feature of theirs is especially useful for new investors or for those who tend to panic when the markets fall.

To find out more about the performance of these funds across market phases, read Balanced Advantage Funds Offer Stability In All Market Conditions

Conclusion

Balanced advantage funds are also called all-season funds because of the dynamic-allocation strategies they follow. These funds have been able to contain the downside using different strategies and have given decent returns with much less volatility. Therefore, if you are looking for a long-term investment with lower volatility than that in a pure equity fund, you can consider balanced advantage funds.

Related Mutual Fund Articles