Balanced Advantage Funds

 

Balanced Advantage Mutual Funds – Reduces Risk and gives good return at the same time !

In the world of mutual funds, there are various kinds of categories for different requirements and risk appetite. One of the categories I want to talk about today is “Balanced Advantage” Category.

What are Balanced Advantage Mutual funds?

Simply speaking a balanced advantage fund dynamically shifts between equity and debt depending on the market valuations. What it means is that when the markets are over heated and high, the fund decreases its exposure to equity and move the money into debt, so that if the markets fall, the down side is protected.

Similarly when the markets are on lower side, the fund increases the exposure to equity and reduces the debt side.

This strategy significantly reduces the volatility of the fund compared to an equity fund and at the same time, the returns potential also comes down.

A lot of funds in this category also name their funds as “Dynamic Asset Allocation Fund” rather than “Balanced Advantage”

Some of the examples of the funds in this category are

ICICI Prudential Balanced Advantage Fund

Motilal Oswal Most Focused Dynamic Equity Fund

Adtya Birla Balanced Advanced Fund

Kotak Balanced Advantage Fund

Reliance Balanced Advantage Fund

HDFC Balanced Advantage Fund

How does a Balanced Advantage Mutual fund work?

A balanced advantage fund uses a predefined algorithm and based on Market PE or P/BV or some other internal indicator to determine if markets are on higher side or lower side and then based on that they keep increasing or decreasing the equity exposure.

To explain : Let us take an example of how ICICI Prudential Balanced Advantage fund which was the first fund of this type in mutual fund Industry and very successful in that category.

Disclaimer : The example of ICICI balanced mutual fund only because it’s the biggest in the category and quite old one in Industry and we have some data to show. It’s not a recommendation to buy. We have some equally good funds from other AMC’s also.

They use P/BV (price to book value) as an indicator to decide is markets are over heated or not.

Equity Exposure changes with Market movements

You can watch how the equity exposure has changed over time from Apr 2010 – Sept 2018 to get an idea. You can observe that the equity exposure increases when Sensex levels goes down and vice versa.

Limits downside and upside

The main benefit of Balanced Advantage funds is that it controls and extreme upside or downside. So you will not see very deep losses , but at the same time you will also not see very high profits.

However, the balanced advantage funds will provide decent market returns (but not comparable to pure equity funds)

Even in the flat markets, you can see that the balanced advantage category has generated positive returns by taking advantage of the volatility.

Who should invest in Balanced Advantage (or Dynamic Asset Allocation) funds?

Now the big question is – Which kind of investors should invest in Balanced Advantage fund and When?

Who should invest? 

It’s mainly for those investors whose focus is on reducing the risk, but at the same time enjoying better returns than Fixed Deposits. The fund value will still be volatile, but the intensity will not be as high as a pure equity fund. From Returns point, it will give decent return of 2-3% above FD returns, but that is all you should expect over a long term. 

When to Invest? 

As it is observed that the equity exposure is already controlled by the fund itself, you can actually invest anytime you want. There is no need to time the market, because the fund itself times the market internally. There are no issues if you want to put lump sum or SIP. 

Who should not invest? 

An investor who wants higher return potential and can take the higher volatility, should not be ideally investing in these funds. However, if you are unsure of the markets levels and want to play safe, you can invest lump sum in balanced advantage fund and thensetup a STP (Systematic transfer plan) to an equity fund. This will reduce the risk to some extent.

Important : Don’t confuse this category of funds with “Balanced Funds”. Balanced Funds are those mutual funds which have mix of equity and debt in their portfolio with equity exposure of around 65-70% and rest Debt.

A good choice for Retired Investors

These kind of mutual funds are very good choice for retired investors who want returns better than the fixed instruments and at the same time, can’t handle too much volatility in their portfolio. So some part of their portfolio can surely be invested in balanced advantage or dynamic asset allocation funds (same thing, but different name)

If you want to invest in balanced advantage mutual funds, you can Empathee Solutions - connected with Largest Mutual Fund Platform in India to know the process and get a well designed portfolio.

Let me know if you have any questions regarding this fund of mutual fund? Was it clear enough?

Invest in Mutual Funds

Start investing in mutual funds with quality advice and monitoring support by Empathee Solutions. We build the portfolio as per your financial goals and your risk appetite.

Open E-WEALTH Account

Financial Planning Service

Plan your financial goals with a robust portfolio which creates quality wealth over long term.

Largest Mutual Fund and Investment Platform

Welcome.. 2021... It's time to plan finances.

Time for Financial planning

Before welcoming the new year, take out  some time to evaluate your financial planning for the past year.

This is not a huge task.  If we want to shape our future, we need to understand our present.  Similarly, current financial situation needs to be assessed for next financial planning.

Year ending is best time to understand financial status !

Understand your financial situation before the end of the last week of the current year and prepare financial plan of coming year.

 About financial objectives -

- Ask yourself some important questions while reviewing your financial plan

1) Have you succeeded in achieving your financial goals?

2) If some of your goals are long-term, it will take some time to achieve them altogether.  But have the steps and short-term financial goals been achieved?

3) Are credit card arrears paid on time?

4) Have you taken out new loans?

5) Has your investment portfolio been reviewed?

6) Are there any unnecessary expenses that can be avoided?

Golden Rules of Financial Planning

After answers to all these questions have been found... ask yourself... Has your financial planning been successful? 

If the answer to this question is yes, then congratulations!  You can do your next year's financial planning with double enthusiasm.

If the answer is no, don't despair... Find the causes of failure and find a solution;  So that you can prepare your financial planning by considering all these mistakes while planning ahead.

If your previous year's financial planning has failed, divide it into four parts when planning a new one-

 -Monthly

 -Quarterly

 -Half yearly

 -Annual

This will not confuse you when planning.  Also, if the financial planning of each part is successful, it can be checked at the end of the part and if it is not successful, the reasons can be found instantly and measures can be taken against them.

Consider the following points when planning the next financial year.

1.  Symptoms of debt

Debt and debt repayment planning-

Eliminate debts that are detrimental to your financial health, that is, repay them as soon as possible.

If you have taken a loan from a family member or close friend, repay it first.

 2.  What is frugality?

Thrift is not stinginess.

You have full control over your earnings.  When it comes to financial planning, don't calculate every dime just for savings and investment.

There are so many small  in life, think of them too.  Set aside a portion of your earnings for this dream.

 This will not make your financial planning boring and you will accept it wholeheartedly, not as a cure.

 3.  Investment objectives and enthusiasm

Alternative income for savings and investments

Find an alternative income rather than sacrificing your little dreams for the fulfillment of your big dreams, debt repayment, investment, etc.

Also consider increasing income while reducing costs to increase savings.

4.  Investment planning

Making a new investment every year or raising the existing investment limit provides long-term benefits.  Therefore, it is important to give equal importance to investment while planning.

Check your investments, stop low return plans and  replace with the best return investments in your portfolio.

5.  What is latest formula of Saving ?

Change spending habits-

Often, we can increase our savings by changing our spending habits.  E.g.  Do you really need meals, expensive gym, branded clothes, shoes, accessories in an expensive hotel?  If you ask yourself this question, the honest answer is no.  So save these costs wherever possible.

Branded items are often cheaper when shopping online.  So the option of shopping online can be considered rather than the mall.  Of course, then make a decision by comparing the prices of the items you find online and outside.

Late payment charges can be deducted if all bills are paid on time.  So discipline yourself by recognizing the importance of regularity.

Loans, insurance, credit cards, etc.  Pay accordingly by keeping in mind the last dates of important things like installments, insurance renewal.

 6.  Financial planning and a sustainable livelihood

Digital payments and rising costs:-

Nowadays, due to the variety of digital payment options, shopping is easy even without money in the pocket.  As a result, it has become difficult to control costs.

It is necessary to keep an account of digital transactions, to create its own set of rules, cost limits.

Do not increase the credit limit of the credit card.  So again the cost may go up.

Don't buy unnecessary or expensive items by falling pray to offers like interest free EMI, double / triple cashback.

Financial planning doesn't have to be this way.  You should review your financial planning every month.

 * Be financially literate *

 

Link for integrated investment and asset allocation platform:

 E-wealth Account

 Empathee Solutions