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Financial markets are notorious for being quite unpredictable – and we are currently living in one of those times where we are seeing volatility as markets react to global signals – war in Ukraine, oil prices or inflation in the United States . Investing your hard-earned money in complex market situations requires deep understanding and strategic planning.
One of the most popular investment strategies is asset allocation, which follows the underlying principles of a balanced diet – a healthy metabolism requires the right balance of nutrients like carbohydrates, proteins, minerals , fats, etc. Likewise, one way to maintain a healthy investment portfolio is to diversify the asset classes in which you invest.
One of the main asset allocation strategies is Dynamic Asset Allocation, or Balanced Advantage Fund. The idea here is to dynamically adapt your allocation of two asset classes, debt and equities, depending on market conditions.
What is a Balanced Advantage Fund?
An Advantage Balanced Fund deals with the dance of two top asset classes, debt and equities, according to the tunes being played in the markets. Imagine you’re in charge of mission control for a rocket, and your job is to stay on course for the goal: the moon. You have a set trajectory that you want to follow, but you must maintain the right balance between your main driver (debt allocation) and your thrusters (equity allocation) or you will miss your target.
Depending on the magnitude of market swings (from minor space junk to major asteroids), you alter your trajectory by manipulating debt or equity allocations (engines or propellants) and recalibrating your path to your financial goals (the moon).
Asset management firms or fund managers use complex mathematical models to decide equity and debt allocation, based on the market, to maximize investment returns. These investment models and strategies are thoroughly tested by the fund managers to ensure that the main objectives of the fund can be achieved.
To avoid interference on your way to the moon, you can either take the shorter route through the debris or take a longer route around it.
The countercyclical model involves increasing equity allocation and reducing debt allocation in declining markets and vice versa. The idea is to buy cheap and sell big. The scale of the model, of course, is derived from different valuation metrics like price-to-earnings (P/E) ratio, price-to-book (P/B) ratio, etc.
A pro-cyclical model calls for an approach that fundamentally reflects market trends that is, increasing equity allocation and decreasing debt allocation in rising markets and vice versa for a falling market. These models rely on market trend indicators like daily moving averages and measuring the health of a trend (standard deviation, downside deviation, etc.).
Benefits of a Balanced Advantage Fund
In volatile markets and faced with unpredictable fluctuations, Balanced Advantage Funds can be very advantageous.
● A balanced advantage fund allows you to move from an equity-based allocation model to a debt-based model, independent of time. This is called asset rebalancing.
● A Balanced Advantage Fund allows for a steady stream of income with a Systematic Withdrawal Plan or SWP.
● Dynamic asset allocation also protects your investments against declines in a bear market, while profiting from the upsides in a bull market.
● It allows you to overcome investment biases during a volatile market and stay disciplined, improving your chances.
● Because Balanced Advantage Funds are taxed like equity funds, you are more likely to receive tax-advantaged returns with this strategy.
Things to know before investing in a Balanced Advantage Fund
Although dynamic asset allocation can help you reduce your losses, there are some things you need to consider before opting for it.
Longer term investment horizon: Due to the portfolio’s equity holdings, this strategy may generate negative short-term returns. This means that investors in these funds should ideally have an investment horizon of at least three years or more.
Risk: These funds are not totally risk averse, although a significant portion of assets are invested in debt securities. Equity components can expose balanced benefit funds to equity market risks, but they are still considerably less risky than pure equity funds.
Return: Returns from this strategy are unlikely to be higher than those of pure equity funds, but they may be higher than those of fixed income funds. A relatively aggressive investor with an investment horizon of three to five years is in the best position to see positive results.
Goals: Balanced Advantage Funds are ideal for those looking for a low-risk, long-term investment, as they have the potential to provide relatively positive returns over a period of time as well as offer tax efficiency.
None of us can predict with certainty what the market will look like in the future. We don’t know what someone like Elon Musk is going to do next and how his tweets might move the markets, and we don’t know all the potential dangers of going to the moon until we’re actually there. in the space. The essence of stock market investing is finding the right balance between asset classes in unpredictable market conditions, and a Balanced Advantage Fund is a great vehicle for an exciting investment journey.
Disclaimer: An Investor Education and Awareness Initiative by Mirae Asset Mutual Fund
All mutual fund investors must go through a unique KYC (Know Your Customer) process. Investors should only deal with registered mutual funds (RMF). For more information on KYC, RMF and the complaint procedure in case of a claim, you can consult the Knowledge Center section available on the Mirae Asset Mutual Fund website.
Investments in mutual funds are subject to market risk, read all plan documents carefully.