What are the asset allocation models under a balanced advantage fund and how do they work?


There are several mutual fund houses, categories, and schemes to choose from. This makes mutual funds a popular investment choice as there is a type of scheme for every investor. A balanced advantage fund, often known as a hybrid mutual fund, is one of them.

There is no predetermined minimum or maximum level of exposure to any one asset class. According to the state of the market, these funds can also alter their asset allocation. The asset allocation between the two primary asset classes, equity and debt, in a balanced advantage fund is handled dynamically based on the state of the markets. 

How do the balanced advantage funds work?

    • Being a type of hybrid mutual fund, balanced advantage funds invest in a mix of debt and equity assets.
    • These funds are referred to as dynamic asset allocation funds because they are capable of dynamic asset allocation and reallocation. As the market completes an entire cycle, they provide a superior mix of returns that can outperform inflation over the long term by limiting the downside.
    • A balanced advantage fund rebalances its portfolio when the equity or bond exposure veers too far from its overall target allocation.
  • Various socioeconomic, geopolitical, economic, and other factors influence their tendency to change the asset allocation. 

What are the asset allocation models under a balanced advantage fund?

  • Counter-cyclical model

In essence, this model is designed to purchase low and sell high. In declining markets with lower stock prices, counter-cyclical models increase equity allocation and reduce debt allocation. Alternatively, equity allocation is decreased in rising markets. 

Although stock price is one of the most frequently used criteria, other factors are also considered. To forecast the market movement and company performance, some fund managers employ additional telling indicators like the price-to-book ratio, dividend yield, and price-to-earnings ratio. 

  • Pro-cyclical model

Pro-cyclical models lean towards a bullish investing strategy where fund managers tend to invest in equity when the markets are high and hope to sell when the markets go even higher to make considerable capital gains. However, this approach is riskier. Hence, only investors with a high risk appetite should consider investing in balanced advantage funds that follow a pro-cyclical model. 

Pro-cyclical models are based on indicators of market trends, such as daily moving averages and measures. Other variables, including valuations and macroeconomic conditions, may be used in some pro-cyclical models.

Wrapping up

Balanced advantage funds employ a process-driven strategy to balance the portfolio of the fund between equity and debt, making them a popular subcategory of hybrid mutual funds. These funds are free to distribute the corpus to stocks and debt on a dynamic basis, as the name “dynamic asset allocation” suggests. These funds are not required to adhere to a defined ratio and can alternate between the equity and debt asset classes depending on the state of the market.