What is Balanced Advantage Fund that safeguards investor's wealth in market downturn?

Investors in the stock market often face the dilemma of when to make their investments. The fear of further decline haunts them when the market is down, while the fear of selling at the peak keeps them worried when the market is soaring. In such a situation, Balanced Advantage Funds (BAFs) prove to be beneficial for investors.

Let’s start with the question of what a Balanced Advantage Fund is all about. It is a type of Mutual Fund that combines both equity and debt components. The allocation between equity and debt in a BAF varies based on market conditions, interest rates, and macroeconomic factors. These funds shield investors from market volatility by adapting to the prevailing conditions. Whether the market is experiencing a downturn or reaching new highs, BAFs aim to minimize risk for investors by achieving a new equilibrium.

Relevance of BAFs in the current environment: In a rapidly changing market landscape, it becomes challenging for individual investors to constantly adjust their portfolios. Presently, the world has been grappling with prolonged geopolitical tensions in Eastern Europe, the threat of global economic recession, inflationary pressures, and increasing interest rates. In such an environment, funds like ICICI Prudential Balanced Advantage have effectively managed their equity and debt allocations over the past decade.

An illustrative example for better understanding: These funds follow a stringent in-house valuation model for equities to determine whether stocks are overpriced or undervalued. For instance, during the sharp decline in the Sensex in March 2020 amid the pandemic, when it fell below the 29,000-mark, the fund increased its net exposure to equities to 73.7 percent. By November 2021, when the market reached a level of over 60,000 points, the Balanced Advantage Fund reduced its net equity exposure to less than 30 percent. As of May 2023, the net equity investment of BAF stood at 39.7 percent.

The strategy behind Balanced Advantage Fund: The strategy employed by Balanced Advantage Funds involves purchasing undervalued stocks during market downturns and exiting them during market upswings. This approach helps investors generate profits during bullish market phases. It's important to note that the net equity exposure of these funds can go as low as 30 percent, although generally, the exposure to equity is maintained at 65 percent and above.

Note: Please be aware that past performance is not indicative of future results, and it is advisable to consult with a financial advisor before making any investment decisions.

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