Balanced Advantage Fund vs Multi-Asset Allocation Fund
A balanced advantage fund or multi-asset allocation fund gives exposure to multiple asset classes in a single scheme.
Investors wanting to manage equity and debt in the portfolio dynamically will prefer a balanced advantage fund. Investors wishing to maintain a constant allocation to equity, debt, and gold will choose a multi-asset allocation fund. Let's deep dive
Asset allocation is vital for optimum returns.
Every investor needs to have appropriate asset allocation in their investment portfolio. Asset allocation gives much-needed diversification. Also, there is a low or no correlation between different asset classes. So, if one asset class underperforms, the outperformance of other asset classes makes up for it. Therefore, appropriate asset allocation can give optimum portfolio returns.
|Year||Best performing asset class||Second best performing asset class||Third best performing asset class|
|2020||Gold (28.2%)||Equity (16.8%)||Debt (10.4%)|
|2019||Gold (24.6%)||Equity (10.9%)||Debt (9.5%)|
|2018||Gold (7.6%)||Debt (6.7%)||Equity (2.6%)|
|2017||Equity (33.4%)||Gold (6.3%)||Debt (6.0%)|
|2016||Gold (10.1%)||Debt (9.8%)||Equity (5.0%)|
|2015||Debt (8.7%)||Equity (-2.0%)||Gold (-6.6%)|
|2014||Equity (34.2%)||Debt (10.5%)||Gold (-6.0%)|
|2013||Debt (8.3%)||Equity (7.6%)||Gold (-7.9%)|
|2012||Equity (32.0%)||Gold (12.4%)||Debt (9.1%)|
|2011||Gold (32.5%)||Debt (7.9%)||Equity (-24.8%)|
As seen be seen in the above table, in the last ten years,
- Gold asset class gave the best investment returns in 5 years,
- Equity asset class gave the best investment returns in 3 years and
- Debt asset class gave the best investment returns in 2 years
The main reason for asset allocation is that as an investor you don’t know which asset class is going to perform better in the coming years. Asset allocation is not a defensive strategy but an aggressive strategy to max out returns by effective being present in all asset classes. The above table makes it amply clear that different asset classes outperform in different years. Hence, having a mix of multiple asset classes in your investment portfolio is essential. As a result, there can be a considerable variation in the quantity of returns by two different asset classes in the same year.
For example, in 2014, the equity asset class gave returns of 34.2%, while the gold asset class gave returns of -6%. Thus, an investor with exposure to only gold would have suffered losses on the gold held in the investment portfolio and also missed out on an opportunity to earn good returns on equity.
In contrast, in 2011, the gold asset class gave returns of 32.5%, while there was a considerable underperformance by the equity asset class, which gave returns of -24.8%. Thus, an investor with exposure to only equity would have suffered huge losses on the equities held in the investment portfolio and also missed out on an opportunity to earn good returns on gold.
Hence an investor must have appropriate asset allocation as per risk profile. Consequently, the returns on an investment portfolio depend more on appropriate asset allocation rather than the investment product selected.
A balanced advantage fund and multi-asset allocation fund can give you exposure to multiple asset classes in a single scheme. So let us explore these funds.
What is a balanced advantage fund?
As per SEBI categorisation of mutual funds, a balanced advantage fund dynamically manages its investment in equity/debt. It is an open-ended dynamic asset allocation fund. SEBI has categorised balanced advantage funds under the broader category of hybrid schemes.
In a balanced advantage fund, the fund manager actively manages the equity and debt component of the fund based on specific criteria. The criteria can include parameters like:
- Price to earnings (P/E) ratio or
- Price to book (P/B) ratio or
- Combination of above or other parameters
SEBI has not specified any minimum exposure to equity and debt. Hence, the fund manager can choose to invest up to 100% in either equities or debt. The asset class mix depends on the market opportunity.
Depending on the debt allocation, these funds fall lesser than diversified equity funds during market falls. This is because the equity portion offers growth potential, while the debt portion offers downside protection and lends stability to the fund performance.
How does a balanced advantage fund work?
A balanced advantage fund works by dynamically managing the investment in equity and fixed income instruments based on market valuations. When the equity market goes up, the proportion of the equity component will go up. Based on parameters such as price to earning (P/E) ratio or price to book (P/B) ratio or others, the fund manager may feel the equity market is overvalued. During such times, the fund manager reduces the equity component and increases the debt portion. The dynamic rebalancing protects the investor returns in the event of a market fall. When the equity market actually falls, the fund manager can do the rebalancing again by reducing the debt component and increasing the equity component once.
Performance of balanced advantage fund category
The scheme is suitable for those investors who would like to benefit across market conditions by dynamically managing equity and debt allocation in the portfolio. But first, let us look at the performance of the balanced advantage fund category compared to the benchmark.
|Scheme/Index||1 year||3 years||5 years||Since inception|
|Nifty 50 Hybrid Composite Debt 65:35 Index (Benchmark)||33.59%||14.22%||13.17%||14.04%|
Note: The returns are as of 2nd July 2021. The one-year returns are absolute. The three years, five years, and since inception returns are CAGR. Some balanced advantage funds have the Nifty 50 Hybrid Composite Debt 65:35 Index as the benchmark, while others may have other indices as benchmarks.
What is a multi-asset allocation fund?
As per SEBI categorisation of mutual funds, a multi-asset allocation fund invests in at least three asset classes with a minimum asset allocation of at least 10% each in all three asset classes. It is an open-ended scheme investing in three asset classes: equity, debt, gold, etc. SEBI has categorised multi-asset allocation funds under the broader category of hybrid plans.
A multi-asset allocation fund offers much-needed diversification to an investor’s portfolio.
Importance of gold and debt in a multi-asset portfolio
In the first section of the article, we saw how gold as an asset class had outperformed equity and debt in five of the last ten years. We also saw how debt gave higher returns than equity and gold in two of the ten years. So, equity could outperform gold and debt in only three of the last ten years. The last ten years’ data underlines the importance of gold and debt in a multi-asset portfolio. When you invest in a multi-asset allocation fund, you get an opportunity to invest in gold and debt along with equity.
Performance of a multi-asset allocation fund
The scheme is suitable for those investors who would like to maintain allocation across multiple asset classes such as equity, debt, gold, investment trusts, etc., in their portfolios. But first, let’s look at the performance of the multi-asset category average as compared to the benchmark.
|Particulars||1 year||3 years||5 years||Since inception|
|Multi-asset category average returns||26.11%||11.12%||10.72%||12.86%|
Comparison of balanced advantage fund and multi-asset allocation fund
|Balanced Advantage Fund||Multi-asset Allocation Fund|
|Risk profile: Due to the debt component, the risk profile of a balanced advantage fund is lower than that of a diversified equity fund. But, the risk profile of a balanced advantage fund is higher than that of a multi-asset allocation fund.||Due to the exposure to three different asset classes, the risk profile of a multi-asset allocation fund is lower than that of a balanced advantage fund and a diversified equity mutual fund.|
|Who should invest: Investors who are happy with just equity and debt in their portfolio will prefer investing in a balanced advantage fund.||Investors looking for a more diversified portfolio with equity, gold, and debt will prefer investing in a multi-asset allocation fund.|
|Asset allocation management: A balanced advantage fund is suitable for those investors who would like the equity and debt portion of their portfolio to be managed dynamically depending on market conditions.||A multi-asset allocation fund is for those investors who would like to maintain a constant allocation to equity, debt, and gold in their portfolios.|
Asset allocation for goal planning
An investor should follow asset allocation for their goal planning and accordingly design the investment portfolio. Appropriate asset allocation will require them to invest in a multi-asset allocation fund or balanced advantage fund along with diversified equity funds. To get the most suitable mutual fund recommendations, you can download the Glide Invest App.
You will get guidance for:
- A personalised risk profile assessment
- Identifying your financial goals
- Appropriate asset allocation
- Making a financial plan for each goal
- Automating the financial plan
- Review and analysis of your financial plan
- Hand holding you till your financial goals are achieved.