Balanced advantage funds (BAFs), also known as Dynamic Asset Allocation Funds (DAAFs), Since markets trade at stretched valuations and investors, grow nervous, emerging markets are becoming investor favorites.
Depending on equity valuations, these funds can have an exposure of up to 80% in stocks, while the minimum is 30%.
The rest of the funds would be invested in the debt of the securities.
BAFs pull stocks from their portfolios when valuations are high and buy them back when markets collapse as part of their rebalancing strategy.
The investor can handle market volatility quite comfortably with a quick, effective, and conservative investment strategy. Therefore, investors get maximum gains from both asset classes – debt and equity.
A Balanced Advantage Fund might be a good investment at a time when equity valuations are not cheap and on key indices are at all-time highs.
Additionally, these funds help investors be better positioned for a full market cycle by reducing downside risk when markets fall.
BAFs are worth considering for investors who are jittery regarding the current levels of the market but at the same time do not want to lose out on any further rise in shares in the near future.
The five things to know about BAF:
Valuation Strategy: The usual practice of valuing the stocks on the price to earnings (P/E) basis against BAFs exert the price to book (P/B) as their valuation model while selecting stocks.
When it comes to estimating the intrinsic value, BAFs are relatively better allocated of the companies which form the portfolio of the scheme, with the help of P/B the model.
Thus more dependable when it comes to investment, it is also worth explaining that book value is a balance sheet item.
Deals With Market Volatility: A volatility-driven market makes investors wary generally, they end up making mistakes. It’s a fact that maximum investors are unable to buy low and sell high.
On the other hand, BAFs, use market volatility as a growth tool in their favor to create wealth.
While buying stocks that have a low valuation and trading them when stocks are transpiring at higher levels of the fund’s in-built highlight of dynamic asset allocation enables the scheme to efficiently manage volatilization.
Stable Growth In Investments: With the ability to reduce the downside in investment valuation, the investors will keep worries aside and help in the wealth creation journey.
During that phase, it is worth highlighting when returns from key indices are negligible, and a dynamic asset allocation strategy tends to outperform the pointers by a wide margin.
Dynamic Allocation: A BAF does not have the restraint of a pure balanced fund which has to insert a limit of 65-70% in equity, the rest will be in debt.
The investment freedom was to allocate as high as 80% in equity and 30% on the lower side.
Diversification: A diversified investment portfolio does not let mass risks ruin wealth creation and help allow investors a risk-adjusted return.
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