What are balanced advantage funds? 5 reasons why they can help you navigate market volatility

The benchmark Nifty 50 index has declined by 2,359.05 points, i.e., 9.37% over the last month, currently trading at 22,819 points. The current market volatility and pessimism, triggered by the US-Israel-Iran war in West Asia, have prompted investors to look for safer investment options.

Against this backdrop, Balanced Advantage Funds (BAFs) are gaining traction as the equity markets remain volatile amid global uncertainty. These hybrid funds can offer investors a stable and disciplined route to long-term wealth creation, provided an individual is willing to understand them based on professional guidance, invest and hold their ground. Investor behaviour and understanding of fundamentals are critical in such cases.

Harish Krishnan, CIO – Equity, Aditya Birla Sun Life AMC, has pointed out that investor behaviour is often influenced by market swings, which can make staying invested through cycles challenging. "This disciplined asset allocation framework seeks to participate in equity upside while aiming to moderate volatility, helping investors navigate changing market conditions more comfortably,” he said.

What are balanced advantage funds?

Balanced advantage funds are nothing but hybrid mutual funds. These mutual funds dynamically shift between equities and debt-based valuations. The investment decisions of these funds are based on factors such as changing market conditions, earnings forecasts, currency strength, and the health of equity markets in general.

Some prominent funds of this category include, Aditya Birla Sun Life Balanced Advantage Fund, HDFC Balanced Advantage Fund, ICICI Prudential Balanced Advantage Fund, SBI Balanced Advantage Fund and Kotak Balanced Advantage Fund.

How balanced advantage funds work

On a fundamental level, these funds follow valuation-driven models to adjust equity exposure. When markets appear expensively valued, the equity exposure is reduced. Whereas when markets look fairly valued, the fund managers increase equity exposure. This way, the primary objective is to always balance risk and returns.

5 reasons why these funds can help investors navigate volatile markets

1. These funds are designed for dynamic allocation. This can help investors automatically balance equity with debt, thus reducing the overall risk exposure.
2. Exposure to debt instruments in these funds is generally reflected during severe market downturns. It helps in cushioning market falls and unforeseen recessions.
3. These funds can help investors build composure and behavioural discipline, which are fundamental to successful investing. Holistically, a balanced advantage fund helps reduce impulsive and reckless investment decisions.
4. These funds also offer investors tax efficiency and peace of mind, as they are taxed similarly to other equity mutual funds.
5. These funds are designed to perform across market cycles. That is why it can be considered by investors who prefer both growth and consistency in their portfolios.

Should you consider them?

The decision to invest primarily depends on the individual and the guidance they receive from their certified investment advisor. Factors such as risk tolerance, current financial health, debt obligations, pending loans, monthly income, age and long-term financial goals must be given due consideration before investing in any investment product.

Furthermore, it is critical to keep in mind that, like all other financial products, these funds are also not risk-free. The returns in these funds depend on factors such as fund strategy, asset allocation, and long-term market conditions. In a serious bull market, the returns of these investment products may lag pure equity funds, and incorrect allocation calls can influence outcomes.

The returns are not guaranteed and are subject to market risks. Performance depends on the fundamental fund strategy. This makes it critical for aspiring investors to sit down with a certified financial advisor to discuss these funds, their current financial position, and long-term investment objectives before making any investment decisions.

Disclaimer: This is for informational purposes only and not investment advice. Mutual fund investments are subject to market risks. Please consult a certified financial advisor before making investment decisions.

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