Everyone recommends buying cheap and sell expensive in the stock market, but often the opposite happens. Often, people don't understand when to buy and when to sell. Fear and greed are key drivers for investors in the stock market. There is a fear of buying in a market that is crashing and not being able to stop in a rising market. Often, our emotions hinder our decision-making.
The second problem is that if you sell and make a profit, the next question is where to invest the money. We also worry about exit load, capital gains, taxes, etc. applicable in the scheme. In such a situation, investing based on certain rules can prove to be helpful.
Learn About Balanced Advantage Funds
Balanced Advantage Funds is a category of mutual funds in which the buying, selling, and portfolio rebalancing are all based on pre-defined rules. According to SEBI, these are open-ended dynamic asset allocation funds. These funds can invest in both equity and debt asset classes and the allocation between equity and debt is decided on the basis of capital market conditions. If the rules are decided in advance, greed and fear won't come into play. And the scheme is managed in such a way that the tax on capital gains is less and maximum profits remain in the hands of the investors. Let's try to understand some of the funds in this category.
Aditya Birla Sun Life Balanced Advantage Fund
This is one of the best funds in this category. This fund evaluates the stocks on the basis of the price-earnings ratio (PE ratio). The fund selects the stocks in the portfolio according to the top-down and bottom-up methodology. While choosing the shares, along with the economy and business cycle, attention is also paid to the financial status of the company. First, it is ascertained which sector will perform better in the coming time, and then the best stocks of that sector make it into the portfolio of this fund. The debt portfolio consists of high-quality investment instruments with a maturity of less than 2 years so that the risk remains low. This fund was launched on 25th April 2000 and the past performance of the fund has been excellent. The regular plan has given a compounding growth of around 10 percent per annum since its inception. At the same time, in the last one year, this fund has managed to get returns of about 29 percent and in the last 5 years, on average, more than 10 percent.
ICICI Prudential Balanced Advantage Fund
This fund is a pioneer fund in this category. It evaluates stocks on the basis of its own price to book model and on this basis, if a stock shows strong returns potential with low risk, it gets a place in the portfolio of this scheme. Between 30 percent and 80 percent of the total assets of this fund are invested in select stocks in the large and mid-cap categories. The scheme was launched on 30th December 2006 and the regular plan of this fund has given an average rate of return of around 11 percent per annum since its inception. The fund has registered average returns of over 25 percent (in the last year) and over 10 percent (in the last five years). The returns of direct plans are even better as the expense ratio is less there.
Nippon India Balanced Advantage Fund
This is also a good fund in this category. When SEBI redefined the category of mutual funds in 2017, Reliance Mutual Fund renamed Reliance NRI Equity Fund as Reliance Balanced Advantage Fund. Later, in the year 2019, when Nippon Mutual Fund acquired Reliance Mutual Fund, the name of this fund became Nippon Balanced Advantage Fund. The fund evaluates stocks on the basis of price-earning ratio and short and medium-term momentum. This fund was launched on 15th November 2004. However, initially, it belonged to a different category. If we look at the performance of this fund since its inception, it has registered a compounded growth of about 16 percent annually. However, it won't be appropriate to take these returns for reference as the fund was different at that time. The fund has recorded an attractive average annual return of around 29 percent in the last one year and around 11 percent in the last 5 years.
Funds in this category are suitable for investors who are looking to invest in mutual funds based on the stock market for the first time. Those who want to invest in the stock market with limited exposure, as well as investors who want to get money for their regular expenses through a Systematic Withdrawal Plan, can also consider investing in such funds.
The author of this article is Pankaj Mathpal, a Certified Financial Planner and CEO, Optima Money Managers.