Such behavioural bias can cause you to earn less than the market because it is not always easy to time the market. The decision is best left to the expertise of mutual fund managers who have the better ability to forecast the market movement and accordingly shift allocation between asset classes. For instance, when the market is on a downward trend, fund managers use this as an opportunity to hike their equity exposure to pick stocks available at attractive prices and reward investors over the long term.
Balanced Advantage Funds is one such mutual fund category that has asset allocation as its inbuilt strategy. The allocation is modified dynamically based on the market conditions -- when the equity valuation soars the allocation is shifted towards debt while that of equity is reduced, and vice versa.
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What are Balanced Advantage Funds?
As per SEBI norms Balanced Advantage Funds, also known as Dynamic Asset Allocation Fund, are open-ended funds that dynamically allocate assets between equity and debt. Unlike other hybrid fund categories such as Aggressive Hybrid Fund, Conservative Hybrid Fund, etc. that follow static asset allocation model, Balanced Advantage Funds have the flexibility to dynamically shift asset allocation between equity and debt depending on prevailing market conditions and outlook. This can help reduce losses during steep market correction and benefit from the growth potential of equities when valuations are favourable.
It is important to note that most Balanced Advantage Funds invest minimum 65% of its assets in equities to benefit from the favourable tax treatment and to generate higher returns. The balance is invested in debt securities and cash to provide stability during uncertain market conditions. Many funds in the category also invest in arbitrage/derivatives for hedging purpose.
Balanced Advantage Funds may underperform the market during bull run but protect the downside better during bear phase, enabling better risk-adjusted returns.
The category is suitable for investors with moderately-high risk appetite and an investment horizon of 3-5 years or more.
Table: Performance scorecard of Balanced Advantage Funds
Data as on April 16, 2021
(Source: ACE MF)
*Please note, this table only represents the best performing Balanced Advantage Fund based solely on past returns and is NOT a recommendation. Mutual Fund investments are subject to market risks. Read all scheme related documents carefully. Past performance is not an indicator for future returns. The percentage returns shown are only for an indicative purpose. Speak to your investment advisor for further assistance before investing.
Each Balanced Advantage Fund differs from the other in terms of asset allocation strategy. While some prefer to follow a conservative approach and make higher use of hedging techniques like derivative/arbitrage others may be aggressive in their approach. This can have a direct impact on the performance and the risk profile of the scheme.
Moreover, the performance of the schemes lies in the fund managers skill and ability. Most fund managers use valuation-based metrics in constructing and managing the portfolio. P/E Ratio, P/ BV Ratio, Price / Earnings Growth Ratio and Price / Free Cash Flow are some of the parameters used along with a long-term view, market sentiment, and outlook of the company.
Ensure that you select a worthy and suitable fund based on its quantitative as well as qualitative parameters.
Best Balanced Advantage Fund to invest in 2021:
Some of the best performing Balanced Advantage Fund based on our analysis and research at PersonalFN are as follows:
- Edelweiss Balanced Advantage Fund
- ICICI Pru Balanced Advantage Fund
Here are the parameters you need to look into to select the best Balanced Advantage Fund:
Quantitative Parameters:
Before investing in a Balanced Advantage fund, assess your risk profile, investment objective and investment horizon to select a suitable scheme in the category.
Then analyse the fund's consistency in performance across various market periods (bull and bear market phases) compared to the benchmark and category peers. While all funds may perform well during the bull phase, an important parameter when selecting a Balanced Advantage Fund is to determine its ability to manage the downside risk during tough market conditions by how it efficiently it manages asset allocation between equity and debt.
Determine whether the fund has rewarded its investors well for the risk they have taken using risk-reward ratios like Sharpe Ratio, Sortino Ratio, and Standard Deviation over a 3-year period.
When shortlisting funds for your portfolio, give preference to those funds that stand strong on risk-reward parameters.
Qualitative Parameters:
Qualitative parameters are often overlooked though they are a vital aspect in the selection process. It involves determining the quality of the portfolio and the efficiency of fund manager/house.
The fund house should have a significant performance record and must follow robust investment processes with adequate risk management systems in place.
And because the fund's performance is directly dependent on the ability of its fund manager to timely shift allocation between equity and debt, check the qualification and experience of the fund manager and the track record of the other schemes they manage.
Look at the fund's portfolio for how well diversified it is across asset classes as well as the securities within those asset classes. For instance, for the equity portion, assess the fund's market cap bias viz. large-cap, multi-cap, etc. and determine whether the holding is spread across a range of stocks and sectors. Remember that a concentrated portfolio can expose you, the investor, to higher risk.
Note that a Balanced Advantage fund that hedges its equities using derivative/arbitrage strategies may be prone to lower volatility and protect the portfolio better during steep market corrections.
For the debt portion of the portfolio, check the credit profile of the underlying securities. The fund should hold a predominant allocation to high quality papers to reduce the credit risk. Moreover, the fund should be well placed to rebalance the portfolio depending on the interest rate outlook.
Yes, we know that the above list is a lot for an average investor to look at. It involves number crunching and much of the data is not easily available in one place. But if you do need to narrow down on the top funds, these factors are of utmost importance.
Watch this short video on selecting mutual fund schemes:
At PersonalFN, we select and recommend mutual funds based on quantitative and qualitative parameters using our S.M.A.R.T Score Matrix:
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S - Systems and Processes
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M - Market Cycle Performance
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A - Asset Management Style
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R - Risk-Reward Ratios
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T - Performance Track Record
The outlook for Balanced Advantage Fund in 2021:
Despite recent correction due to the second wave of COVID-19, equity valuations are currently expensive and thus, the margin of safety has narrowed. However, instead of redeeming equity investment one can consider investing in a worthy Balanced Advantage Fund that can make well use of market ups and downs by shifting allocation between equity and debt. Remember that the long term equity outlook is positive and can reward you with inflation-beating returns.
Balanced Advantage Funds have the flexibility to increase its allocation to low risk avenues such as debt/cash/derivative allocation to provide stability to the portfolio, during uncertain and volatile market conditions such as the one we are witnessing now.
Notably, redeeming investments to rebalance allocation between equity and debt has tax implications. However, the tax liability does not arise when the fund that you are investing in does it for you. This is where a Balanced Advantage Fund can prove to be beneficial.
Investors who are not sure about when and how much allocation should be shifted between equity and debt amid dynamic market conditions can consider investing in Balanced Advantage Funds.
PS: If you are looking for quality mutual fund schemes to add to your investment portfolio, I suggest you subscribe to PersonalFN's premium research service, FundSelect. Currently, with the subscription to FundSelect, you could also get Free Bonus access to PersonalFN's Debt Fund recommendation service DebtSelect.
Under DebtSelect, we give high weightage to schemes displaying worthy portfolio characteristics. We avoid debt mutual fund schemes that aim for higher yields by taking undue higher credit risk with substantial exposure in instruments issued by private issuers.
If you are serious about investing in a rewarding mutual fund scheme, Subscribe now!
Warm Regards,
Divya Grover
Research Analyst
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