What are Balanced Advantage Funds and Who Should Invest in Them

balanced advantage funds

If you’ve been watching the India vs New Zealand World Test Championship final on Hotstar, you would have come across the ICICI Prudential Balanced Advantage fund ad.

So, what exactly is a balanced advantage fund? And is the ICICI Prudential one the best one to invest in?

Let’s find out.

What is a balanced advantage fund?

A balanced advantage fund is a hybrid mutual fund.

Hybrid because it invests in both equities and debt. Equities in the form of stocks, of course. Debt in the form of bonds, treasury bills, government securities. The rationale is: Equity for growth and debt for stability.

Equities will help balanced advantage funds deliver good long-term returns while debt instruments will give moderate returns. But since debt instruments are not directly susceptible to stock market volatility, they will help limit losses in turbulent markets.

Balanced advantage funds are actively-managed funds that use dynamic asset allocation. This means that there is a fund management team that decides what the allocation between equity vs debt should be. And also where to invest within equity and debt.

So, does this strategy work? Well, when things are going well, most funds will do well. No need to look there. But the primary selling point of balanced advantage funds is that they will protect your money in the event of market crashes. Have these funds been able to do that?

How have balanced advantage funds performed in market crashes?

To check this, I identified 3 periods of bear markets:

  • 22 Jan 2008 to 26 Nov 2008 (US economy, lending crisis)
  • 24 Aug 2015 to 16 Feb 2016 (slowdown in China, global weaknesses, NPAs of Indian banks)
  • 1 Feb 2020 to 23 Mar 2020 (Union Budget, Yes Bank moratorium, COVID-19 lockdown)

To check the returns of balanced advantage funds over these periods, I used a free tool by Value Research – Point-to-Point Returns.

Here’s how the funds performed in comparison to Nifty.

As you can see in the image, balanced advantage funds have managed to curtail the fall as compared to the Nifty during these periods. So yes, the strategy works.

Which balanced advantage fund should you invest in?

We now know that balanced advantage funds do deliver on the promise of ‘attack with defence.’

And who should invest in them?

  • Retired folks or those close to retirement
  • A novice investor starting out with mutual funds
  • Someone who just doesn’t want a lot of risks

And is the hugely-advertised ICICI Prudential Balanced Advantage fund the best one? Umm, not really.

The Value Research Fund Selector tool shows that it has a ridiculously high expense ratio and not the best 1-year returns. Click here to dig deeper.

That is all. Hope this helps you invest in balanced advantage funds.

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