How to choose the right balanced advantage fund based on your risk appetite?

Market volatility is something that no investor can ignore. One moment the market is rising, and the next, it can experience a sharp decline. If you do not react on time, fluctuating markets can affect both the returns and the capital invested in mutual funds. But it is not always easy to time the market with precision and take accurate buy or sell calls in response to market fluctuations. As such, investors who do not want to take high risk but still want to benefit from market opportunities can consider balanced advantage funds (BAFs).

To enjoy these benefits, you must invest in balanced advantage funds based on your risk appetite. After all, your risk tolerance helps you determine how much you can afford to invest and how much risk you are willing to take. Having said that, let’s take a look at how to select the right BAF as per your risk appetite and make strategic decisions.

Understanding BAFs

BAFs are hybrid mutual funds and are also known as dynamic asset allocation funds (DAAFs). These funds offer the dual benefit of equity and debt investments in a single fund.

The asset allocation of BAFs is dynamic and adjusts to the market movements in real-time. As the market changes, BAFs quickly react and shift the proportion of equity and debt holdings to reduce the risk of losses and maximise profits for investors.

Crucial strategies to choose the right balanced advantage fund based on your risk appetite 

  1. Analyse the fund’s performance 

Look at the fund’s performance over the past 1-3 years, Sharpe ratio, standard deviation, and beta to assess its risk-reward profile. A higher Sharpe ratio indicates a better risk-adjusted performance. The standard deviation measures the fund’s volatility, and the beta measures the fund’s sensitivity to market movements.

For conservative investors, it may be beneficial to choose a fund with a lower standard deviation and beta. Aggressive investors may prefer a fund with a higher Sharpe ratio. By aligning the risk profile of the fund with your personal risk appetite, you can optimise returns while minimising risks. 

  1. Check the portfolio composition

Consider a fund that has a well-diversified portfolio and doesn’t overly invest in a few stocks or sectors. A diversified portfolio reduces the risk of losing your investments during market volatility.

Add blue-chip stocks to the mix because these stocks have a stable earnings record and can handle unpredictable market conditions better. Also, consider funds that invest in high-growth sectors like technology and healthcare to diversify more and create a balanced investment portfolio.

  1. Look for low expense ratios and exit loads 

Expense ratio is the percentage of your investment used to cover the fund’s operating costs. A lower expense ratio means more of your investment goes towards generating returns. However, a lower expense ratio alone does not guarantee better fund performance. So, it’s crucial to evaluate other factors such as past performance, fund manager experience, investment philosophy, and applicable exit loads.

  1. Compare different AMC and fund managers

Check different asset management companies and compare their fund manager’s experience, investment style, and risk management strategies to make sure they fit your investment goals.

Reviewing how both AMCs and fund managers have managed BAFs over different market cycles further helps to understand their profile. This way, you can improve the probability of generating better returns while keeping your risk within acceptable levels.

While these tips and strategies are helpful, it is always recommended to work with a financial advisor. Their professional guidance and ongoing support in different market cycles can help you invest in mutual funds more efficiently.

Post Author: Jordyn Kyle