There will always be short-term downsides in investment. There is no way of avoiding it, but there are ways of limiting it. One such efficient means to control the downsides may be investing in a balanced advantage fund (BAF). So, for Sharad to deal with spells of volatility, such funds may be the best bet. Contrary to a lay investor’s perception, the favourable scenario for equity investment is when the equity markets are on a decline and valuations have turned attractive. A falling market comes with the promise of gains in the future. Typically, each BAF scheme has its own unique model, which predicts the market direction on the basis of valuation parameters and allows the fund manager to increase or decrease equity exposure. Unlike an equity scheme or a typical balanced hybrid fund, the BAF can reduce its equity holding when the markets look expensive and are likely to witness a sharp decline.
This helps reduce the scheme’s downside as it declines less than the overall market correction. When the markets are on the rise again, the BAF is well poised to capitalise on the gains as it can increase equity allocation when valuations turn attractive. The fund’s dynamic asset allocation strategy indicates that the exposure to equity and debt asset classes is flexible and changes as per the dynamic market conditions. So, in an equity-favourable scenario, the scheme increases gross equity exposure and reduces debt exposure, and vice versa. The exposure is dynamically managed in such a manner that the schemes remain equity-oriented, with gross equity (equity plus arbitrage) exposure at 60-65% and, therefore, enjoy equity taxation. BAF is a ‘buy it, shut it, forget it’ kind of fund. Investing in it does away with the need to find the opportune time in the market because the scheme aims to find the right opportunities for the investor in any market cycle. What investors like Sharad often forget is that while gaining more than the market is important for wealth creation, it is equally important to fall less than the overall market to reduce potential losses in one’s portfolio.
Content on this page is courtesy Centre for Investment Education and Learning (CIEL).
Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.
