Let’s start with an example Raman wants to Invest his fixed deposit maturity proceeds of Rs.50 Lakhs. Unlike last year, valuations are not attractive and investment decisions are not so easy. He is also worried about the sharp up moves and down moves that take place in the market over the past year. He is also vary of the fact that what happened last year would continue going forward. He is stressful if it would be the right time to invest in the market and may be happy to park this money again in a deposit to minimize risk. Raman’s colleagues have suggested him to invest in a balance advantage fund but he wonders how is a balanced advantage fund different from other balanced funds. So before we move forward in addressing Raman’s concerns lets understand what a balanced advantage fund is: –
So What Is a Balanced Advantage Fund?
- BAF(Balanced Advantage Fund) is a hybrid mutual fund, as defined by the SEBI. These are often open-ended mutual fund schemes that invest in asset classes such as equity, debt, and arbitrage instruments with the goal of capital preservation and reasonable wealth generation.
- The exposure between equity, debt, and arbitrage is constantly maintained in such a way that the schemes remain equity-oriented funds with gross equity (equity plus arbitrage) exposure of 60-65 percent, allowing them to enjoy the equity taxation.
- According to the scheme’s dynamic asset allocation strategy, the exposure to equities, debt, and arbitrage instruments is flexible and fluctuates as market conditions change. As a result, in a scenario when equity is favorable, the plan raises gross equity exposure while reducing debt exposure. When equity appears to be out of favour, the fund manager of the plan reduces equity and increases debt exposure.
- An equity-favourable scenario is when equity markets are on the decline and valuations have turned attractive. A falling market is accompanied by the prospect of future gains.
- Each BAF scheme often has its own proprietary model that forecasts market direction based on certain valuation metrics and allows the fund management to raise or decrease equity exposure.
- Unlike an equity scheme, the BAF can lower its equity holdings if markets appear to be overvalued and are likely to experience substantial falls.
- This will also assist you reduce the scheme’s downside as it declines less than the overall market correction. BAF is well-poised to capitalize on the gains in the market as it can increase allocation when valuations turn attractive.
- The balancing role that BAF performs in your portfolio is critical to your long-term wealth building. Investors frequently overlook the fact that, while outperforming the market is vital for wealth growth, it is also critical to underperform the market in order to minimize portfolio losses.
Why Is Balance Advantage Fund Called An All Season Fund?
- When the asset allocation within the scheme changes, the individual investor is not subject to the tax burden each time the asset allocation changes. As a result, the change in asset allocation within the program has no tax implications.
- Furthermore, fund managers would also be able to time their asset allocations far more efficiently than an individual because they are financial professionals who are better placed and knowledgeable about shifting market conditions.
- The market dynamics that we are witnessing now is unmatched. Volatility in the stock market is here to stay, thanks to both domestic and global reasons. The ability to effectively manage this volatility will be critical to building wealth, which is why a product like BAF should be an essential part of any investor’s portfolio, whether experienced or new.
- Investing in Balance Advantage Funds eliminates the need to time the market because the scheme seeks out the best possibilities for the investor at all times of the market cycle. It handles asset allocation, which is the most significant benefit for an individual who likely lacks the time or resources to research the market and investment prospects. BAF is a perpetual solution to the problem of long-term volatility.
Advantage Of Balance Advantage Fund Over Balanced Fund
The dynamic nature of a balanced advantage fund is extremely useful for long term wealth creation. It ticks all the boxes in terms of asset allocation, tax advantage vis a vis fixed deposits and doing away with the need to find the opportune time to enter the market because the fund is designed to find the right opportunity for investors like Raman in any market cycle.