Balanced advantage funds invest in a combination of stocks, debt and arbitrage opportunities. These funds will decide their equity exposure based on key market parameters or internal parameters. They will invest less in stocks when the market is very high or valuations are stretched. They will invest more in stocks when stocks are available at attractive valuations. In short, they do the job of juggling equity exposure for investors.
Sure, these funds limit equity exposure based on valuations, but does that really make them safe? Are they shockproof? Not really. Don’t be under the false illusion that balanced funds are a safe investment. In fact, many mutual fund distributors make such claims. However, do not be swayed by such talk. Any mutual fund that invests in stocks cannot be safe. Nor can it avoid volatility. So only invest in balanced benefit funds if you can tolerate the risk of investing in stocks. Also, only invest if you have an investment horizon of at least five years.
Anything else you should be aware of when investing in these programs? Yes, you need to make sure the diet is doing what it claims to be. Make sure the plan rebalances the portfolio in a timely manner. For example, there are systems that invest heavily in stocks even when the market is at a higher level or at high valuations. You need to make sure that you don’t engage in such schemes.
If you’re considering investing in Balanced Benefit programs, here are our recommended programs you can consider investing in in the New Year.
Best balanced benefit funds to invest in 2022:
Edelweiss Balanced Advantage Fund
ICICI Prudential Balanced Advantage Fund
Sun Life Aditya Birla Balanced Advantage Fund
ETMutualFunds.com used the following parameters to pre-screen hybrid mutual fund plans.
1. Average rolling returns: Rided daily for the past three years.
2. Consistency over the past three years: Hurst exponent, H is used to calculate the consistency of a fund. The exponent H is a measure of the randomness of a fund’s net asset value series. Funds with a high H tend to show low volatility compared to funds with a low H.
i) When H = 0.5, the return series is said to be a geometric Brownian time series. This type of time series is difficult to predict.
ii) When H is less than 0.5, the series is said to be mean reverting.
iii) When H is greater than 0.5, the series is said to be persistent. The larger the value of H, the stronger the trend of the series.
3. Downside risk: We only considered the negative returns given by the mutual fund plan for this measure.
X = Returns below zero
Y = Sum of all squares of X
Z = Y/number of days taken to calculate the ratio
Downside Risk = Square Root of Z
i) Share of equity: It is measured by Jensen’s Alpha for the last three years. Jensen’s alpha shows the risk-adjusted return generated by a mutual fund relative to the expected market return predicted by the Capital Asset Pricing Model (CAPM). A higher alpha indicates that the performance of the portfolio has exceeded the returns expected by the market.
Average returns generated by the MF Scheme =
ii) Share of debt: Fund return – Benchmark return. The rolling returns rolled daily are used to calculate the return of the fund and the benchmark, and then the active return of the fund.
5. Asset size: For hybrid funds, the asset size threshold is Rs 50 crore
(Disclaimer: past performance is not indicative of future performance.)