BALANCED FUNDS

Most times making a choice between debt and equity proves to be a difficult decision. To overcome this problem, most professionals’ advice that an investor should invest keeping their age & the current market conditions in mind.

However, if you are looking for diversification of your investment portfolio, that you can rebalance regularly, you can opt for hybrid or balanced funds. These funds give you the option of investing in a combination of debt and equity.

Balanced advantage funds that have started gaining popularity over the last three years are dynamically managed equity mutual funds that typically alter their equity allocation between 30% and 80%, depending on market valuations and usually considering the price-earnings ratio. When valuations are high, they reduce their equity allocation; and when low, increase it.

Balanced advantage funds straddle the gap between equity savings and aggressive hybrid.

• For a 1.5-3 year timeframe: Balanced advantage funds are more aggressive and have the potential to deliver higher returns than equity savings funds over periods longer than 1.5-2 years. For aggressive investors, they present a better alternative to pure debt funds for such timeframes. However, ensure that these funds are not the only component in your portfolio – use them in addition to pure debt funds. Conservative and moderate risk investors can stick to equity savings and pure debt funds.

• For a 3-5 year timeframe: Given their hedging and ability to adapt portfolios to market scenarios, balanced advantage funds do not fall as much as hybrid aggressive funds do. More, the hybrid aggressive category has been fading over the past couple of years; many have fallen more than large-cap equity funds in years such as 2018. Consistency in their performance is also taking a beating, and their portfolio strategies – such as moving into mid-caps for higher returns – require a longer holding period than 3 years. So in the place of these funds, you can opt for balanced advantage funds, across risk profiles, and blend them with debt funds and large-cap based funds for a diversified portfolio.

• For very long-term portfolios, if you are an aggressive investor and you wish to keep debt allocations lower than what is necessary, a balanced advantage fund can work well to fill the gap. They can help reduce portfolio volatility and to this extent play part of the role that debt does. So you can partly reduce debt exposure in favour of these funds. Ensure that you do not completely replace debt allocation – use balanced advantage funds along with debt funds.