Balanced advantage funds: Proven performers, but can such funds keep it up in the future?

Manoj Vaidya, a management student, wanted to take charge of his investment decisions and sought a way to balance exposure to both debt and equity without taking excessive risks.

After careful consideration, he decided to invest in a balanced advantage fund (BAF). In early 2020, he made a lump sum investment of INR1 lakh in one of the top-performing BAFs that boasted a remarkable return of almost 30% taking his INR1 lakh investment to almost INR1.3 lakh.

His investment has flourished over time.

Manoj’s decision to invest in a BAF has proven to be a prudent one. The fund's ability to dynamically allocate assets between debt and equity has played a pivotal role in generating favourable returns.

BAFs have always been a push product that have been heavily sold by the industry over the past many years. They’ve been sold as asset allocation products with more weightage to equity and are supposed to deliver good returns with lower risk.

While most of these products have delivered on their promise — investors have always felt a little frustrated. Equity has given far higher returns over the last decade while yields on debt have been low.

Thus, the overall category has not given good returns. But after the year 2021, some of these funds are in top gear. This was the time when the world had taken an easy money policy and equity was on a high. Now, things have reversed. Interest rates are up, and bond yields are high.

For the year 2022, equity is up 5% and the balanced fund category was up 4.51% (according to Morningstar India).

In general, some of the top balanced funds have given the best returns in the industry as they rode on high yields or high-interest rates as almost 25% of their portfolio was invested in high-yielding debt.

Their actively managed equity side of the portfolio has also worked well in a market that was flat. But as interest rates cool off and yields on high-yielding debt fall, will these funds keep delivering the same level of returns?

“Considering the anticipated volatility in the upcoming year, these funds are poised to leverage the opportunities presented by market fluctuations and continue their track record of delivering success through effective asset allocation,” says Sahil Kapoor, senior executive vice president, 360 ONE Wealth.