Mutual Funds: Bet on balanced advantage funds

Geo-political tensions, persistent high inflation and rising interest rates have increased market volatility and dampened investors’ confidence. As timing the entry into equity investments is an impossible task for retail investors, strategic asset allocation must be at the core of their portfolio.

Investors who would like to take less risk based on their risk appetite or life stage should consider hybrid funds such as balanced advantage funds now. In these funds, the fund managers work on the allocation across different asset classes based on their views on the stock market, interest rate and other relevant parameters. The equity allocation is in the 30-70% range depending on the market conditions. These funds are good for investors who want to take limited risk and generate overall returns between equity and debt.

More aggressive investors should prefer aggressive hybrid funds that are equity-oriented and would invest 70-80% of the assets in equity. These funds may not necessarily reduce the risk as most of the time they will have higher equity allocation. However, those investors who want to take marginally less risk compared to full equity exposure should invest in these funds. These funds are ideal for those who are looking for a more aggressive alternative to pure debt funds and want to invest in equity for higher return potential, while limiting their losses in case the markets fall.

Harshad Chetanwala, co-founder, MyWealthGrowth.com, says those investors who have their asset allocation aligned with their financial goals should consider gradually adding equity funds in present market conditions to maintain their asset allocation. “As whenever the stock market corrects it reduces the equity allocation in the portfolio. The key is to remain focused on the asset allocation and invest the available surplus in equity to maintain the asset allocation,” he says.

Balanced advantage funds

Balanced advantage funds invest in a mix of stocks, debt and arbitrage opportunities, depending on the market condition. In fact, if the equity allocation falls, these funds will invest in arbitrage. Investors who are not adept in deciding their asset allocation can invest in these funds where the fund manager will do the allocation in equities and debt depending on the market conditions. Fund managers of these funds bring down the equity exposure when market valuations are high and increase the equity exposure when the valuations are low. So, an investor can gain from both rising and falling markets by investing in these funds.

In these funds, the fund manager has the liberty to invest in equities or debt without any restriction of minimum or maximum allocation, which makes balanced advantage funds a better choice within all hybrid funds for investors. Investors should hold the fund for a long-term—three to five years—to benefit because in the short run these funds can give negative returns. These funds are treated as equity funds for tax purposes and attract a 10% long-term capital gains tax for holding periods above one year on gains above Rs 1 lakh.

Aggressive hybrid funds

Aggressive hybrid funds are ideal for those investors who can tolerate some level of risk in the investment to achieve their long-term goals without worrying too much about the market volatility.

Aggressive hybrid funds help the investor in asset allocation because by diversifying the assets across equity and debt asset classes, these schemes reduce the risk of market volatility and generate higher returns in the long run. At the time of market volatility, the fund managers will rebalance their asset allocations because different asset classes vary in different market conditions. Experts say regular rebalancing will make asset allocation work and can generate higher risk-adjusted returns.

BALANCE THE ODDS

— Balanced advantage funds invest in a mix of stocks, debt and arbitrage opportunities

— These funds are treated as equity funds for tax purposes and attract a 10% LTCG tax on gains above Rs 1 lakh in a year

— Hold the fund for three to five years to benefit since in the short run these funds can give negative returns

— Aggressive hybrid funds are ideal for those who can tolerate some level of risk to achieve their long-term goals