Are Balanced Advantage Funds For You?

With the equity market growing more volatile, balanced advantage funds/ dynamic asset allocation (BAF/ DAA) funds are growing in popularity.

In February 2021 (for which the latest data is available at the time of writing this story) these funds saw inflows worth ~2,005.8 crore. Let us understand how these funds work and their pros and cons before we decide to invest in them.

The current environment

At present, an economic recovery is underway. At the same time, prices of a wide range of commodities, including crude oil, have shot up. This is leading to higher inflation. Bonds yields are moving up. There is fear that if inflation is very strong, it may force central banks to abandon their pro-growth, accommodative monetary stance. Central banks may then have to hike interest rates to rein in inflation. This would be negative for the equity markets.

Valuations within the Indian equity market are also not inexpensive. That, too, is causing anxiety among investors.

At the same time, a lot of investors are positive about the economic recovery and the expected recovery in corporate earnings. They expect earnings growth to drive the equity markets forward in the future.

Thus, a tug of war is on within the equity markets between the bulls and the bears. There is no certainty about whether the markets will move further up or correct. This is responsible for the volatility we are witnessing periodically.

In such an environment, many investors may like to invest in a type of fund that follows a model-driven approach towards allocating to equities and debt.

How do BAF/DAA funds work?