As the markets turn volatile, investors should consider balanced advantage funds (BAFs) for better risk-adjusted returns. These are ideal as a core stabiliser in a portfolio for risk-averse investors or those seeking smoother returns without timing the market.
These funds dynamically manage allocation between equity and debt — cutting equity exposure when valuations are stretched and raising it when markets turn attractive. This helps in cushioning the downside during corrections while still participating in upturns.
With the Nifty 50 down about 6%, the Nifty Midcap 150 lower by 6.3%, and the Nifty Smallcap 250 off by nearly 9.5% over the past year, this is a good opportunity to add equities at relatively cheaper levels. “The performance of BAFs depends on each fund house’s allocation model, and returns in a sharp bull market may trail pure equity funds,” says Nirav Karkera, head, Research, Fisdom.
Increasing equity exposure
Fund managers are raising equity allocations as debt yields have softened and valuations in some equity segments are now attractive. With the recent GST rate cuts and renewed consumption momentum, consumer durables and discretionary sectors appear to benefit and offer positive returns.
Leading asset management companies such as ICICI, HDFC, SBI, TATA, Kotak, and Aditya Birla Sun Life have significantly increased their equity holdings. Together, these funds account for over 70% of the category’s assets, making the trend a significant one.
Since BAFs are built to dynamically move between equity and debt, the current tilt towards equities reflects managers’ intent to capture potential upside in a market recovery, while still keeping debt exposure as a buffer against volatility. “Fund houses see an opportunity to balance downside by leaning into equity exposure over the next two to three months,” says Swapnil Aggarwal, director, VSRK Capital.
Asset allocation
There is no one-size-fits-all allocation in BAFs as their core purpose is to dynamically shift between equity and debt depending on market conditions. Instead of locking into a fixed equity–debt split, investors should focus on whether the fund house’s model is responsive, disciplined, and consistent in managing risk across market cycles. These funds work best with a 3–5 year holding period.
In the current environment—where markets have corrected and valuations look more reasonable—a moderately higher equity tilt (50–65%) appears optimal. This allows investors to participate in potential recovery while still having the comfort of debt allocation (35–50%) to cushion volatility. “That’s a balanced middle ground – enough equity to ride the recovery, but also enough cushion to handle volatility,” Puneet Sharma, CEO, Whitespace Alpha.