Balanced advantage funds, also known as dynamic asset allocation funds, have gained popularity in recent years as a viable investment option for young investors. These funds aim to strike a balance between equity and debt investments, actively adjusting the allocation based on market conditions. For young investors who are just starting their investment journey, it is essential to consider various investment options to build a robust and diversified portfolio. Below are six reasons why young investors should consider adding balanced advantage funds to their investment mix.
What are balanced advantage funds?
Balanced advantage funds are mutual funds that typically invest in a mix of stocks, bonds and other investments with the goal of balancing growth potential and downside risk management. They aim to provide a balance of capital appreciation potential from stocks along with income and downside protection from bonds and other fixed-income investments.
The value proposition of balanced advantage funds
Balanced advantage funds have a value proposition for young investors as they offer a good blend of equity and debt. These funds invest in a mix of equity, debt and gold based on market conditions to provide stability as well as capital appreciation over the long term.
- Diversification
Balanced funds provide exposure to multiple asset classes in a single investment. This helps in proper diversification of one’s portfolio which is an important principle of investment. As a young investor, you need exposure to equities for higher returns but also need stability from debt investments. A balanced fund gives you both.
- Reduced volatility
Since balanced funds invest in a mix of asset classes, the overall volatility of returns is lower compared to pure equity funds. This helps young investors who have a longer investment horizon and need some stability in returns. The debt portion acts as a cushion during market downturns.
- Flexibility
Balanced funds have the flexibility to change their asset allocation based on market conditions to maximize returns. They can increase equity allocation during market rallies and increase debt during corrections. This tactical asset allocation helps generate better risk-adjusted returns over the long term.
- Cost effective
Balanced funds are a cost-effective way for young investors to implement asset allocation. Creating and rebalancing a multi-asset portfolio yourself may involve higher costs and efforts. A single balanced fund investment allows you to harness the expertise of fund managers and achieve proper asset allocation at low cost.
- Tax efficiency
Balanced funds can also be tax efficient compared to investing directly in asset classes. The flexibility to book losses from debt and gains from equity within the fund can help offset gains and reduce the overall tax burden for investors. This works well for the long-term investments of young investors.
Conclusion
Balanced advantage funds offer a good investment solution for young Indians who are just starting their investment journey. The blended returns, reduced volatility, flexibility and tax efficiency of such funds make them an ideal fit for building long term wealth over the next 2-3 decades.