Tide over market volatility with Balanced Advantage Funds
Sep 2024
3 mins read
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What drives returns in a portfolio? A study conducted by Brinson et al concluded that the performance of a portfolio is explained the most by asset allocation decisions. The study shows that other decisions such as stock selection and market timing play a relatively smaller role. This is why strategies that follow an asset allocation approach help investors avoid the inherent biases faced by them while investing.
Markets can be unpredictable and taking active asset allocation decisions can be an uphill task for many investors. Thus, a hands off approach to managing asset allocation is to consider investing in Balanced Advantage Funds or Dynamic Asset Allocation Funds.
What makes Balanced Advantage Fund unique is that they are governed by a model which is transparent and decide the equity/debt allocation as per the perceived risk in the market. Balanced Advantage Funds allocate money to equity and fixed income based on the percentage allocation suggested by the model. This takes the human bias out of equation while fund manager’s intervention is limited to stock selection.
How do they work?
Balanced Advantage Funds typically follow a P/E based variation asset allocation filter, that automatically recommends asset allocation decisions across equity and debt in different market phases. The asset allocation across equity and debt is dynamically managed based on the market valuations which helps in taking two critical decisions:
Increase equity exposure: When the equity market is undervalued i.e. Current P/E is significantly lower as compared to historical average, the model recommends increased allocation in equities. As a result, the debt exposure goes down.
Decrease equity exposure: When the equity market is overvalued i.e. Current P/E is significantly higher as compared to historical average, the model recommends decreasing allocation in equities. Consequently, the debt exposure goes up.
In addition to PE, Balanced Advantage Funds may use other filters and macro-economic indicators to take active calls on asset allocation. The fund’s strategy can differ across fund houses and is usually disclosed in fund’s literature.
While the asset allocation to equity and fixed income asset classes are governed by a predetermined model, decisions regarding selection of stocks and which sectors/stocks go overweight or underweight is taken at the fund manager’s discretion. The equity allocation is diversified across sectors and themes giving investors ample diversification.
Benefits of Balanced Advantage Fund:
Asset Allocation: You don’t need to worry about tweaking your equity and debt allocation as the fund takes these decisions on your behalf.
Risk Mitigation: As these funds invest both in equity and debt, the balanced allocation provides downside protection when equity markets fall.
Tax-efficient: Balanced Advantage Funds typically keep the equity exposure at 65%, which helps these funds qualify for equity taxation.
Diversification: These funds have the leeway to invest across a wide spectrum of themes/stocks/sectors spanning large, mid and small cap companies.
Flexibility: You can start an SIP or invest lumpsum in Balanced Advantage Funds. The minimum investment amount may vary across fund houses.
Withdrawals: You can invest lumpsum in BAFs and initiate Systematic Withdrawal Plan (SWP) if you wish to take advantage of the wealth creation potential of equities and at the same time do not wish to take undue market risk when you require regular cash flows.
Wealth creation: Equities as an asset class has the potential to beat inflation over long run and a longer-term horizon helps you get capital appreciation and create wealth for your long-term goals.
Overcome behavioural bias: Market drawdowns can be unnerving for many investors, making them susceptible to withdraw their investments or hold on to making fresh investments. The automatic asset allocation model of BAF helps you overcome this behavioural bias and reap the benefit of long-term compounding.
A well-diversified asset allocation strategy increases the likelihood of achieving your investment objective while controlling the level of risk. Investors who wish to start their equity investing journey or even existing investors who are looking to outsource their asset allocation decision can consider investing in Balanced Advantage Funds. Balanced Advantage Funds help you tide over market volatility with ease and at the same time give you the benefit of equity taxation.
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 tolerance before investing.
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PGIM India Asset Management Private Limited
(CIN - U74900MH2008FTC187029)
Toll Free Number: 1800 266 7446
Email: care@pgimindia.co.in
This is an Investor Education and Awareness Initiative by PGIM India Mutual Fund.
All the Mutual Fund investors have to go through a one-time KYC (Know Your Customers) process. Investor should deal only with the Registered Mutual Funds (RMF). For more info on KYC, RMF and procedure to lodge/redress any complaints, visit https://www.pgimindia.com/mutual-funds/ieid.
MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY. Read more
All the Mutual Fund investors have to go through a one-time KYC (Know Your Customers) process. Investor should deal only with the Registered Mutual Funds (RMF). For more info on KYC, RMF and procedure to lodge/redress any complaints, visit https://www.pgimindia.com/mutual-funds/ieid.
MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY. Read more
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on the basis of publicly available information, internally developed data and other third-party
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