Proper allocation of assets is essential for any investor seeking to diversify their mutual fund portfolio and mitigate risk. But asset allocation across multiple asset classes, like equity, bonds and gold, requires careful research and in-depth knowledge of the markets. However, not everyone can handle allocating assets on their own or even have the time to regularly review each investment separately and rebalance them. This is where balanced advantage funds (dynamic asset allocation) and multi-asset funds come into the picture.
Both these funds provide an investor exposure to different asset classes in a single investment – but which one is better? Read on to find out!
What is a multi-asset allocation fund?
Multi-asset allocation funds are open-ended hybrid schemes that invest in at least three asset classes such as equity, debt, and gold. Of the three asset classes, each must have a minimum allocation of at least 10%, allowing for a balanced approach with the potential for higher returns due to the lowered risk that comes from diversification.
What is a balanced advantage fund?
A balanced advantage fund is a type of mutual fund that invests in both stocks and bonds. It typically seeks to balance risk and return by investing in both asset classes with the objective of achieving better returns while limiting exposure to market volatility. BAFs generally use an active management strategy, meaning the portfolio managers will actively adjust the portfolio’s composition in response to changing market conditions.
Are balanced advantage funds better than multi-asset allocation funds?
Both multi-asset allocation and balanced advantage funds are hybrid fund categories designed to provide investors with proper diversification across asset classes. Investors can invest in them online through online portals or mutual fund investment apps. Furthermore, both investments can be made via a lump sum or a systematic investment plan (SIP).
So, while both have certain features beneficial for different investors, balanced advantage funds offer additional benefits, making them appealing to investors interested in maximising their returns and managing risk simultaneously. A few of the most important ones are: –
- Dynamic allocation between stocks and bonds
Balanced advantage funds follow a dynamic approach to asset allocation that allows for responses to changes in market conditions, allowing for greater flexibility in how the risk and volatility are managed.
As markets fluctuate, investors are able to increase or reduce their equity share depending on the stock prices – meaning that some parts of the portfolio may be allocated heavily into equities to achieve potentially higher returns, while other parts may be invested more conservatively into debt instruments to balance the overall risk exposure.
Additionally, this strategy can help reduce portfolio volatility over time as it provides a more balanced approach across different asset classes.
Multi-asset funds are known for their ability to provide an investment portfolio of different asset classes. This allows for lower volatility due to a diversified portfolio that is created from the combination of three or more negatively correlated assets. For example, when the stock market falls, debt fund and gold can contribute stability due to their inverse correlation.
Dynamic asset allocation funds further this benefit by allowing the flexibility to actively adjust their allocations based on market conditions and investment strategies, further reducing risk and balancing out volatility.
To sum up
For those investors who want a more diversified portfolio with equity and debt, a multi-asset allocation fund can be an ideal option. On the other hand, if an investor wants their portfolio to be managed dynamically between equity and debt depending on market conditions, they may prefer investing in a balanced advantage fund. For more clarity and a better understanding of these funds, investors can consult an experienced financial advisor who can help them decide what investments make sense for their peculiar situation.