Gaining insight into the concept of balanced advantage funds

Gaining insight into the concept of balanced advantage funds


Every investor dreams of leveraging the market for their benefit. After all, who does not want to get the highest returns? However, with unpredictable markets, where investors have to deal with frequent fluctuations and volatility, timing the market and responding quickly to it is difficult. There are always chances of mistakes when trying to seize opportunities in the market. Balanced advantage funds (BAFs) offer a solution to manage such situations.

BAFs are hybrid mutual funds that use a dual approach of equity and debt investments to leverage market fluctuations. These funds help to balance the risk-return ratio in favour of investors by reducing the risk during volatility and boosting the returns during bullish phases. But how?

Understanding the investment strategy

BAFs adjust the allocation between equity and debt instruments dynamically in response to market fluctuations. The fund manager has the flexibility to increase or decrease the allocation to these asset classes to optimise returns and manage risk.

For example, during bullish market phases, the fund manager may increase equity exposure to capitalise on growth opportunities. Similarly, during bearish market phases, the fund manager may reduce equity exposure and increase allocation to debt instruments to reduce risks. This dynamic approach helps in capitalising on market trends and aims to deliver consistent returns over the long term.

Benefits of BAF investments

  • Potential for higher returns

BAFs have the potential to deliver higher returns compared to fixed deposits, savings accounts, or pure debt funds. By dynamically allocating investments between equity and debt based on market conditions, these funds help to capture growth opportunities.

For example, let’s consider an investor who invested a lump sum amount in a BAF in a rising market. As the equity markets perform well, the fund manager increases the allocation to equities, which leads to capital appreciation. Over time, the investor may experience significant growth in their investment, outperforming fixed deposit returns or pure debt funds.

  • Risk management through diversification

These open ended mutual funds provide risk management through diversification across asset classes.

Suppose there is a market downturn that negatively impacts equity markets. In such a scenario, the debt allocation in the fund acts as a cushion and minimises the overall impact on the portfolio. This diversification helps in reducing potential losses compared to pure equity investment. The investor benefits from the stability and income generated by the debt portion.

  • Leverage market volatility through rebalancing

BAFs use active portfolio rebalancing strategies to manage risks effectively

For example, if the equity markets have experienced a continuous price appreciation, and the fund’s equity allocation has significantly increased. The fund manager may decide to rebalance the portfolio to manage the risk of a potential market correction. They may sell some equity holdings and reallocate the proceeds to debt mutual funds to keep the portfolio balanced. This disciplined approach further helps protect the portfolio from the full impact of market downturns.

How to invest in BAFs?

First, conduct thorough research on different BAFs available in the market. Evaluate factors such as fund performance, historical returns, expense ratios, fund manager expertise, and the fund house’s reputation. Now list down BAFs that align with your investment goals and risk appetite. The steps to follow thereafter are:

  • Visit the provider’s official website or download the app that allows investment in mutual funds.
  • Register yourself and create an account.
  • Complete KYC (Know Your Customer) online.
  • Now log in to your mutual fund account again.
  • Find the BAFs you have shortlisted and select the investment option (lump sum or Systematic Investment Plan (SIP).
  • Enter the investment amount.
  • Choose a payment method. The options may include online banking, debit card, or UPI (Unified Payments Interface).
  • Check the payment details and approve the transaction.

Investing in BAFs should not be a “set and forget” approach. Regularly review the fund’s performance and stay updated on any changes in the market conditions. This active involvement helps you make knowledgeable decisions and take necessary actions, such as rebalancing your portfolio with more BAFs or adjusting the investment amount, based on your evolving goals and market dynamics.

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