Individuals are looking at balanced advantage funds for incremental investments as these funds have been able to navigate market volatility effectively and have delivered superior risk-adjusted returns. Since July this year, these hybrid funds have seen net inflows after nine consecutive months of net outflows. These invest in a mix of stocks and debt instruments, based on a dynamic asset allocation process.
During phases of market volatility, indecisive investors tend to favour balanced advantage funds, effectively outsourcing asset allocation decisions to well-equipped investment teams. Moreover, the pause in the Reserve Bank of India’s (RBI’s) interest rates coupled with rising market valuations have prompted investors to switch some of their investments from pure equity to balanced advantage funds.
Dynamic management
In H1FY24, hybrid schemes as a category saw net inflows of Rs 62,174 crore, of which Rs 43,455 crore were into arbitrage funds, Rs 11,830 crore into multi-asset allocation funds, and Rs 3,486 crore into balanced advantage funds, data from Association of Mutual Funds in India show.
Nirav Karkera, head, Research, Fisdom, says the flexibility to manage asset allocation as per market cycles offers balanced advantage funds a distinct edge, especially during times of heightened volatility. “Now is, in fact, an ideal period to invest in such funds to ensure asset allocation strategies are optimised for the volatility and market cycles in a nimble manner. This also ensures that such dynamic management does not entail incremental costs on account of tax and load,” he says.
Similarly, Arun Kumar, VP and head of Research, FundsIndia, says some of the new incremental money meant for equities may be coming into balanced advantage funds now given the discomfort on high valuations. “It is a good category for first time investors as the asset allocation is automatically managed.”
Stable returns
Unlike other hybrid schemes, balanced advantage funds have given steady returns. This has prompted many retail investors to switch to these funds as the returns from the equity market were flat in the first half of the year. Also, as the average age of investors rises, they navigate away from riskier asset classes.
Abhishek Banerjee, founder & CEO, Lotusdew Wealth & Investment Advisors, says as interest rates are stable and the RBI is maintaining its stance of removing accommodation of excess liquidity, these factors are keeping debt yields in check and benefiting early investors who bought debt at higher yields. “A balanced advantage fund can provide staple returns for the core portfolio while satellite allocation in risky equity baskets or risky mutual funds can tilt the portfolio towards more rewarding returns if the investor is willing to accept higher risk,” he says.
Stock markets move based on the macro and micro economic factors impacting different sectors at various times. Gopal Kavalireddi, vice-president, Research, FYERS, says these funds offer sufficient diversification to protect a portfolio from large drawdowns. “With a timely rebalancing process in place, passive investors can invest in these funds without being overly worried about large losses.”
Asset allocation
In balanced advantage funds the bulk of the work — asset allocation, stock selection, sector selection, duration selection, credit rating selection — is done by the asset management company. “This frees up mental space to consider other satellite allocations like risky equity baskets, smaller cap funds, precious metals to augment the core portfolio. We always think that a simpler portfolio is easier to monitor and manage,” says Banerjee.
Balanced advantage funds are incrementally relying on fixed income opportunities to generate returns while trimming equity exposures. Most fund managers actively manage these funds by changing the allocation in a timely manner. In fact, different strategies are adopted to counter spikes and crashes in bonds. “Barbell’s strategy is widely used by fund managers to invest in the short and long ends of the yield curve. Depending on the movement of interest rates, short-term investments provide liquidity and reduced risk,” says Kavalireddi.
Tick the boxes
These funds are suitable for those who are neither conservative nor aggressive but have a more moderate risk profile and expect commensurate returns. Balanced advantage funds should not have more than 25% drawdown given their typical asset mix. So, if the fund has suffered a larger drawdown, investors must do proper diligence before investing.
While general principles of category and fund selection apply to this category as well, investors must specifically check for the fund’s ability to deliver favourable risk-optimal returns especially during times of broader macroeconomic uncertainty and heightened volatility across capital markets.