Top 5 balanced advantage funds (BAFs) you should consider during a volatile stock market

Balanced advantage funds can enhance your investment portfolio. The recent launch of the Canara Robeco Balanced Advantage Fund on July 12, 2024, has renewed interest in balanced advantage funds (BAFs). While these funds have always been popular, the recent bullish stock market led many investors to adopt a more aggressive approach with equity mutual funds.

For those unfamiliar, BAFs, also known as dynamic asset allocation funds, aim to balance risk and return by investing in both stocks (equity) and bonds (debt). This diversification combines the growth potential of stocks with the stability of bonds.

Unlike traditional hybrid funds that maintain a fixed asset allocation, BAFs adjust their equity and debt ratios based on market conditions. This dynamic approach appeals to investors who seek the growth potential of stocks but prefer lower risks. The strategy is ideal for those with a long-term investment horizon.

Top-Performing Balanced Advantage Funds

Here are the top-performing BAFs, along with their five-year and ten-year returns, providing valuable insights for long-term investors:

Fund Name 5-Year Returns (%) 10-Year Returns (%)

HDFC Balanced Advantage Fund 20.73 16.21

Edelweiss Balanced Advantage Fund 17.67 13.38

Invesco India Balanced Advantage Fund 13.62 12.57

Nippon India Balanced Advantage Fund 14.47 12.55

Aditya Birla Sun Life Balanced Advantage Fund 14.69 12.40

Source: AMFI (As of July 17, 2024)

Asset Allocation of Balanced Advantage Funds

BAFs stand out because they do not maintain a fixed asset allocation. Unlike traditional balanced funds with a static equity-debt mix (often 50/50), BAFs adjust these proportions based on market conditions. Here's how they manage asset allocation:

Flexibility: According to Securities and Exchange Board of India (SEBI) regulations, BAFs can allocate anywhere from 0% to 100% of their assets between equity and debt, allowing fund managers to adopt strategic approaches.

Target Allocation: BAFs generally aim for a moderate equity allocation, usually between 60% and 70%, balancing growth potential with lower risk compared to pure equity funds.

Dynamic Adjustments: The key feature of BAFs is their ability to dynamically adjust equity and debt allocations. Fund managers use predefined models to analyze market conditions and determine the optimal asset allocation.

Risk Management: In bullish markets, the fund may increase its equity allocation to capitalize on growth opportunities. Conversely, in bearish markets, it may shift towards debt for added stability, aiding long-term risk management.

Benefits of Investing in BAFs

Investing in BAFs can mitigate the impact of market volatility. By adjusting asset allocations, these funds aim to reduce volatility compared to pure equity funds. This strategy helps stabilize the fund's value, minimizing fluctuations during market downturns.

Disclaimer: The equity allocation in these funds offers the potential for long-term capital appreciation, guided by the fund manager's expertise in response to market conditions.