Balanced Advantage Funds bring the best of both worlds- The thrill of equity and the safety of debt.
BAFs are hybrid active funds that distribute your money into equity, debt, and cash. These funds dynamically shift allocation between equity and debt for superior returns with downside protection.
If you are wondering how to choose the balanced advantage fund, this blog holds the RIGHT answer.
Spoiler alert: Past performance is not the only criteria for selecting funds.
Let’s unwind the strategy.
Balanced Advantage Funds invest about 65-80% of total assets into equity and 35-20% in debt. These funds also hold a small percentage of cash for liquidity or capitalizing on market conditions.
Fund managers strategically and dynamically move the allocation from stocks to bonds.
For example, if the markets are going through a correction, fund managers can increase equity exposure. Similarly, if the markets are overvalued, they can sell off equity and reallocate that money to debt instruments.
These funds deliver superior returns over the horizon of 3 to 5 years or more. Investors with moderate risk appetite can consider hybrid funds instead of pure equity funds. BAFs are the perfect way to introduce instant diversification to your portfolio.
Now, let’s answer your question…
Many investors believe that past performance is the only way to evaluate mutual funds. While past performance can help you understand the consistency of the fund against the benchmark. It’s not the only, or the primary, criteria to evaluate funds.
The most effective way to evaluate any fund is to compare it with benchmark and other funds from the same category. To do so, you can refer to the factsheet of funds to compare key measures.
The key measures AKA key ratios are the technical aspects of the funds. The numbers are always easy to read and they project accurate expectations.
Now, coming back to Balanced Advantage Funds.
Apart from benchmark comparison, one of the important ways to choose BAF that fits your requirements is to compare Cash vs Equity Exposure. You can find this information in the factsheet of the fund.
Let’s take a few BAF examples.
|
Fund Name |
Equity Exposure |
Debt Exposure |
Cash Holdings |
|
59.74 |
26.07 |
14.19 |
|
|
46.96 |
22.38 |
30.66 |
|
|
60.56 |
27.51 |
11.93 |
|
|
71.97 |
14.69 |
13.35 |
The values were fetched on 3 Jan 2023. Click on the hyperlink on each fund to view current values.
Balanced Advantage Funds hold a small percentage of cash for liquidity or to benefit from market movements.
If you think the markets are expensive at the moment and may fall- choose BAFs with higher cash holdings as they can buy more equity.
The more cash holdings, the more you can benefit by increasing equity exposure.
In the above table, ICICI Prudential Balanced Advantage Fund has cash holdings of 30.66%.
Compared to the other funds, ICICI pru BAF will be able to buy more equity when the markets fall.
Contrary to the above filter, if you think the market may rally further, choose the BAF with maximum equity exposure.
When the market boosts, BAF with more equity exposure will naturally deliver superior returns.
In the table above, Edelweiss Balanced Advantage Fund has 71.97% equity exposure. That fund will deliver higher returns compared to other funds during a market rally.
Equity exposure vs Cash holdings is one of the important criteria to consider before investing in Balanced Advantage Funds.
However, as mentioned above, you must also evaluate the fund’s factsheet for more insights. The fund should fit your risk appetite and financial goals.
Now, if you don’t have a view of the market to filter BAFs, you can always contact your financial advisor. They can keep you informed about the market movements and also plan your investments.
Or, you can get in touch with experts at VNN Wealth. If you are looking for financial advisors in Pune, we can meet in person (write to us). Not to worry if you’re not from Pune as you can schedule a virtual meeting with VNN Wealth at your preferred time slot.
Follow @vnnwealth for more insights into the world of finance.
