Can balanced advantage funds be the right choice for beginners?

Meet Mr. Saurav, who invested in the stock market with high hopes but became anxious and panicked during a market downturn. Due to his fear of losing money, he made impulsive decisions and liquidated his investments, only for the market to bounce back and earn profits just a week later. Sadly, Mr. Saurav missed the opportunity for gains due to his lack of experience and investment knowledge.

This situation is quite common among beginner investors, as they might not fully understand the volatile nature of the stock market and the importance of patience during market volatility. However, balanced advantage funds (BAFs), a hybrid mutual fund category, offer a solution to this. 

These funds change their asset allocation dynamically based on market conditions, meaning they hold equity, debt, and arbitrage allocations in different proportions. So, can balanced advantage funds be the choice for beginners? Yes, they can. Here are 4 in-depth reasons that explain why. 

  • Auto asset allocation  

Unlike a balanced fund which has a pre-decided equity-debt ratio, BAFs change their asset allocation dynamically. This means that the fund manager will increase the equity allocation when the market is expected to deliver good returns and decrease it when the market is expected to underperform. Similarly, the debt allocation will be increased when the market is expected to be volatile, which helps in protecting the capital.

Thus, beginners don’t have to monitor mutual fund investments manually or have expertise in the market. Instead, they can rely on the expertise of the fund manager to handle investment decisions.

  • BAFs leverage market volatility to create wealth

When stocks are undervalued, BAFs buy them, and when they become overvalued or reach a high value, they are sold. Hence, BAFs offer protection during market volatility and help them receive the best possible returns on their investments. This helps beginner investors enter the stock market with less worry and responsibility, and they get exposure to various investments through a single fund.

  • Cost-effective diversification  

Diversification holds significant importance in investing. Balanced advantage funds invest in a mix of equity and debt instruments of different companies and sectors, thereby reducing the risk associated with any single company or sector. These models are based on various parameters used in stock valuation, including price-to-book (P/B), price-to-earning (P/E), etc. This helps in creating a balanced portfolio for the investor.

Moreover, BAFs are cost-effective, as the asset allocation is done at the fund level, which saves on brokerage and other transactional costs associated with buying and selling individual securities.

  • Disciplined investing through Systematic Investment Plan (SIP)

BAFs also facilitate systematic investing through an SIP, which helps the investors to invest a small amount every month or a frequency they choose. This is especially helpful for those who are just starting with their investments and want to invest in mutual funds with small amounts regularly.

To evaluate returns on SIP investments, many fund houses and providers offer tools like a mutual fund SIP calculator that help investors compare different interest rates, tenure and returns from different SIP plans. Such tools can help beginners plan investments strategically and maximise returns.

Balanced advantage funds | A balanced approach for new investors

With features like auto asset allocation, cost-effective diversification, and low risk through a multi-dimensional approach, beginner investors can greatly benefit from balanced advantage funds. 

Guidance of a financial advisor can further help investors create a well-rounded portfolio that leverages the benefits of BAFs to the maximum. Their valuable insights can help investors decide whether to invest through SIP or lump sum based on their income, age, and financial situation. This personalised strategy can help in portfolio growth and better long-term financial outcomes, particularly for beginner investors.