How can balanced advantage funds help to handle the market volatility?

Market volatility is a reality that investors have to deal with every day, as the stock market is unpredictable and fluctuates constantly. Various factors make the market unpredictable such as global issues, economic slowdowns, monetary policy changes, and political tensions. These unforeseen situations lead to market volatility, which can be challenging for investors to handle. During such times, many often end up making impulsive decisions, which might not always be in their best interests. 

What if you could leave these market decisions to experts? Balanced advantage funds (BAFs) offer just that. 

Balanced advantage funds are hybrid mutual funds that dynamically change their asset allocation based on the prevailing market conditions. Put simply, they optimise the allocation of equity and fixed-income depending on the market’s performance. 

Here is how balanced advantage funds help to handle fluctuating market conditions:

  • Diversification through the combination of equities and debts

BAFs aim to offer gains in both bull and bear markets by moving funds between the equity and debt markets based on the fund manager’s view of the market conditions. 

During periods of high market volatility, these funds may tilt their allocation towards the debt market, which is typically less risky. This approach helps balance the risk while maintaining the growth potential, making these funds an ideal option for investors who want exposure to the equity market with minimum risks.

  • BAFs are dynamic

Many don’t associate mutual fund investments with being dynamic in nature. However, balanced advantage funds offer an exception. They offer active management, which means that the fund manager will adjust the allocation of your money tactically according to the market conditions. This dynamic and responsive nature to changing economic situations helps BAFs to address market volatility. 

Also, a balanced approach provides better diversification to the investor. During market downturns, the debt instruments will cushion the downside risk, and during market upturns, the equity instruments will provide higher returns.

  • Portfolio re-balancing

Balanced advantage funds use market valuation indicators to determine asset allocation. These include Price-to-Earnings (P/E), momentum and volatility, and price to book value ratios, along with other technical factors.

If the equity market is overvalued, then the fund manager will reduce the allocation towards equity and increase the allocation towards debt instruments. Similarly, if the market is undervalued, then the allocation towards equity will increase. This strategy helps investors to benefit from market opportunities while minimising the impact of negative market events.

  • Risk management through a multi-dimensional approach

Unlike investing in individual stocks, a balanced advantage fund offers protection against market volatility by maintaining a balanced exposure to different sectors and asset classes. These funds have the flexibility to invest in various market caps, sectors, and asset classes in terms of equities and debt instruments. This multi-dimensional approach helps in portfolio diversification and reduces the risk of market fluctuations.  

For instance, if one sector or asset class faces a decline, the other sectors or asset classes may compensate for the loss. Moreover, the flexibility of balanced advantage funds helps in making tactical investment decisions during market fluctuations, leading to a long-term profitable portfolio. 

Secure your portfolio with balanced advantage funds

Balanced advantage funds use dynamic asset allocation, systematic investing, professional fund management, and diversification to handle market volatility in an efficient manner. 

You can invest in these funds online through a Systematic Investment Plan (SIP) or lump-sum mode, making them easily accessible for all investors. However, it is equally important to read and understand the fund’s prospectus, its investment objective, and risk-return outlook before investing. Consulting a financial advisor can further improve your investment strategy, helping you invest wisely as per your financial situation and prevailing market conditions.