Befriend Market Volatility With Balanced Advantage Funds

A Vinod Kumar, Perpetual Investments

It is often said that change is the only constant in this world. And as proof one can see that the global dynamics have been rapidly changing amidst the fears of a widespread outbreak of the corona virus. With the equity markets across the globe undergoing a sharp correction due to the probable impact of the pandemic on economies, retail investors are having a tough time staring at the losses in their portfolio. At such times it is important to be prudent with one’s investment decisions. It is important not to let fear or greed dictate one’s decision-making during such volatile times.

Now is the time to act in the interest of long-term gains. Such market scenarios bring with them almost perfect long-term investment opportunities wherein one can make outsized returns. For an investor, this is the opportunity to be countercyclical i.e. buy low and sell high. But instead of seizing this opportunity, most investors have become risk-averse and are afraid to invest in such market conditions. History, however, has always shown us that different asset classes perform differently over the course of time.

For example, in the year 2002, the return from gold as an asset class was 20%, FD rate was at 8.5 per cent and the Sensex was at a low of negative 4 per cent. However, in 2004, gold gave a 14 per cent return while the FD rates for the same remained at a mere 5.25 per cent and the Sensex saw an 83 per cent high. It is often seen that retail investors are comfortable investing when the market rallies and at expensive valuations. As a result they end up buying high and selling low, which is the exact reverse of what needs to be done. This translates into less than an optimal investment experience.

As a means to address this investment flaw among the masses, fund houses have launched the balanced advantage category of schemes. The balanced advantage or dynamic asset allocation funds are open-ended dynamic asset allocation funds. These funds are a part of the hybrid schemes’ basket. This essentially means that these funds are allowed to change allocation from equity to debt or vice-versa as and when required. Unlike other funds like equity or debt funds, the market regulator has not specified any asset-wise investment limits for these funds. However, asset management companies have their own defined limits for their own balanced advantage funds.

The other advantage of this type of mutual fund scheme is that it takes care of one’ asset allocation needs. Asset allocation is one of the key tenets of prudent financial planning. Most investors, however, may not have the ability to invest across these asset classes based on market developments. This is where balanced advantage fund comes in and does the toggling between asset classes deftly based on market conditions, thereby helping investors with optimised risk-adjusted returns. Furthermore, this category attracts equity taxation, which is a win-win for the investor. As a result, investors can opt for SIPs into balanced advantage funds for meeting long-term goals such as child’s education, marriage or for one’s retirement.

The balanced advantage or dynamic asset allocation funds are open-ended dynamic asset allocation funds. These funds are a part of the hybrid schemes’ basket. This essentially means that these funds are allowed to change allocation from equity to debt or vice-versa as and when required.

Take Away
These categories of funds closely monitor the dynamics of the changing market and accordingly allocate funds to equity and fixed income such that the portfolio performance would be balanced at all times. So, if you are considering making lump sum investments in the current market fall, then the balanced advantage category of scheme should definitely be a part of your investment. Remember, investing is more or less like a rollercoaster ride – once you know you are buckled up safely, you do not have to worry about the ups and downs anymore. A balanced advantage fund provides you with that safety belt to sit back and enjoy the ride.

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