Balanced Advantage Funds: Integral part of any retirement plan

Over the last few decades across market economies, it has been repeatedly experienced that investing in equities is the only way to beat inflation sustainably over long time periods. Equities have emerged at the instrument of choice for retirement savings and many generations of investors have reaped the rewards of this strategy. However, in the aftermath of the 2008 Global Financial Crisis, those who had retired recently and those who were on the verge of retirement were suddenly left impoverished by the dramatic fall in the markets. The fortunate ones managed to extend their working life in order to replenish their savings and recoup their losses, which took many years. The less fortunate were driven to destitution. This brought to the forefront the dilemma that investors face when it comes to taking on risks. If enough risk isn’t taken, the returns generated and the wealth created may not be enough. If enough risk is taken, the possibility of a market crash always looms. An answer to this dilemma was found in managing asset allocation between equity and low-risk investments to manage portfolio risk. Ideally, asset allocation must be managed from two perspectives. The first, which is the investment time horizon, is unique to each investor. Those saving for retirement must take into account the number of working years they have left. This is known well in advance and it is possible to put in place an asset allocation plan for it. The second is common across all investors and there is typically no advance information of it. This is about varying asset allocation based on market conditions. It is important to reduce risks when markets appear to be optimistic and increase it when they are pessimistic. Balanced advantage funds However, changing asset allocation sharply, as is sometimes necessary based on market levels, can create unscheduled tax liabilities which most investors are keen to avoid. At the same time, one must acknowledge that this is, by far, the more important perspective and can be used to avoid a lot of pain. One may well ask how it is possible to plan for something which cannot be known with certainty or even forecast. That’s where balanced advantage funds fit in. Balanced advantage funds are also known as dynamic asset allocation funds. Their goal is to manage allocation between debt and equity based on market conditions. Many of these have framed guidelines that take into account equity market levels, debt yields, market momentum, equity risk premium and many other factors based on which they change asset allocation. Some, like us, have framed specific rules to decide this, eliminating human bias altogether. Since all allocation changes happen within the fund itself and investors don’t need to take any action or undertake any transactions, these don’t just provide an easy solution to the problem, it is also an extremely tax efficient way of managing asset allocation. But most importantly, when one has put aside a reasonable corpus for retirement, balanced advantage funds can protect it from a sharp degradation in value. This doesn’t mean that balanced advantage funds will protect their portfolios unfailingly against all losses. Since, most of them will have at least some allocation to equity most of the time, this will bear the consequences of any market fall. However, since there is a distinct possibility that most of these will reduce exposure to equity in over-optimistic times and increase it during times of gloom, they offer an insulation that human emotions can prevent. This is especially true for completely rule-based asset allocators like us who take great pains to ensure that emotions do not influence the allocation. As such, balanced advantage funds must form an integral part of any retirement plan, especially one which is at an advanced stage. They just make sense. The author is the director & chief executive office of NJ Asset Management Pvt. Ltd. Views expressed are personal.  Mutual Fund investments are subject to market risks, read all scheme related documents carefully. Read all the Latest News , Trending News ,  Cricket News , Bollywood News , India News and Entertainment News here. Follow us on Facebook , Twitter and Instagram .