Understanding the portfolio composition of balanced advantage funds

As an investor, you know that balancing risk and return is critical to maximising your investment profits. But stock markets can be volatile and unpredictable, making it difficult to predict in which way it will shift. This is where hybrid mutual funds can be useful, they offer a diversified portfolio of stocks and fixed income securities, mitigating your risk, offering regular returns along with capital appreciation in the long term.

Among different types of hybrid funds, balanced advantage funds (BAFs) are particularly favoured by investors as they take a dynamic approach to asset allocation. The fund manager combines equity, debt assets, and arbitrage components based on market conditions. This dynamic mix of different asset classes helps in reducing the volatility in the portfolio and capitalising the growth opportunities through active management.

Understanding the portfolio composition of balanced advantage funds 

  1. Equity investing 

Most balanced advantage funds allocate a certain percentage of their portfolio to equity investments. This equity exposure can be up to 80%, with fund managers adjusting the fund’s equity allocation based on prevailing market conditions. For example, fund managers may increase exposure to equity mutual funds when they expect stock valuations to rise or when key indices are going up.

Fund managers use metrics such as Price-to-Earnings ratio (PE ratio), Price-to-Book ratio (PB ratio), and trend indicators like daily moving averages, to determine the equity allocation. They often invest in these stocks based on market capitalization, sectoral allocation, and quality of the company’s management.

  1. Debt investing 

Another key component of balanced advantage funds is debt securities, bonds, and fixed-income instruments. These investments aim to provide a steady income stream for the portfolio while minimising risk. Fund managers tweak the debt exposure depending on market interest rate fluctuations, credit market conditions, and liquidity management.

For example, if they expect a market crash, they may sell off equities and shift their portfolio towards debt instruments, protecting investors from major losses.

  1. Arbitrage opportunities

These mutual fund schemes also invest a portion of their funds in arbitrage components, which reduces the overall risk while generating returns. Arbitrage is a trading technique that takes advantage of price differences of an asset in different markets.

With arbitrage, the fund manager can generate returns with low risk by buying a stock in one market and selling it in another market where the price is higher. As arbitrage opportunities are short-lived, the fund manager needs to keep a close eye on the markets to seize the best opportunities. 

Final words

By investing in a diversified mix of equity, debt, and arbitrage opportunities, BAFs offer investors a well-rounded and risk-managed investment solution. Such diversification helps in creating a balanced portfolio to optimise your returns without getting exposed to excessive risk.

The fund managers of BAFs use strategies such as market timing, behavioural finance, and quantitative analysis, to make informed and timely investment decisions for investors. As an investor, you can benefit from these techniques by starting a systematic investment plan (SIP).

SIP investments help you take advantage of rupee cost averaging, which reduces the impact of market volatility on your portfolio. Moreover, with its automated and structured approach, you eliminate guesswork and risk of emotional decision-making. This helps you meet your financial goals in a systematic and calculated manner.

Post Author: Callie Josue