Balanced Advantage Fund

Asset Management Companies have their in-house mathematical models which decides equity and debt allocations depending on market conditions. Generally, these models are created based on the fund manager’s hypothesis of asset allocation at different valuation levels which can generate superior returns for investors over a long investment horizon. Fund managers duly back-test these models using historical data to see if the funds’ investment objectives can be met.

• Counter-cyclical model: This model increases equity allocation by reducing debt allocation in falling markets and reduce equity allocations in rising markets. These models endeavours to buy low and sell high. However, different fund managers may use different valuation metrics for dynamic asset allocation e.g. P/E, P/B etc.
• Pro-cyclical model: Pro-cyclical models essentially try to follow the market trend and thus increase equity allocation in rising markets while reduce it in falling markets. Pro-cyclical models are based on market trend indicator like daily moving averages and indicators of the trend strength / health (Standard Deviation, Downside Deviation etc.). Some pro-cyclical models may use other factors like valuations, macro-economic factors etc.

• Derivatives are used to manage active equity exposure through hedging which helps the fund managers to keep gross equity exposure above 65% so that investors can avail equity taxation. This is done while keeping in mind the asset allocation determined by the model.
• The other reason for using derivatives is to generate returns for investors through arbitrage opportunities. As you may know, Arbitrage are risk free profits made by the scheme by exploiting price differences between the spot (cash) and the derivatives (Futures and Options) segments of the market.

Risk: Even though these funds have considerable percentage allocation in debt securities, they are not entirely risk free. The reason is equity components, which makes balanced advantage funds vulnerable to equity market risks. This makes the NAVs fluctuate as per the market movements. However, balanced advantage funds are less risky compared to pure equity funds.

Return: The returns of balanced advantage funds would not be like pure equity funds, but perhaps higher than that of fixed income funds. If you are a moderately aggressive investor, you can expect relatively good returns provided you have minimum 3-5 years of investment horizon.

Financial Goals: If you do not like high risk, balanced advantage funds can be ideal for meeting your medium to long term goals as these funds can generate relatively good returns in the long term and are also tax efficient compared to assured income products / or fixed income funds.

Investment horizon: You should have minimum 3-5 years of investment horizon for investing in balanced advantage funds. Investors with lower than 3 years of investment horizon, should not invest in these funds.