“Current state of the markets is puzzling. On one hand, debt market indicates that GDP growth is moderating. On the other hand, the buoyancy in the equities market suggests there is growing optimism in the economy. Sooner or later, one of the two will have to give in.
Presently the nerves of some segments of financial markets are frayed. The liquidity and credit flow is slowing down. Otherwise, good businesses are coming under pressure due to asset-liability mismatch. This trend, if not stemmed now, will pull down the demand in the housing sector, in the automobiles sector, and in the infra sector. This may have a cascading effect on the general economy.
Parallely, the geo-political grounds are shifting rapidly. US investments are pulling out from China and looking for different shores. India would need a strong strategic pitch to attract these investments to herself. For that, India needs to ready herself for 4th industrial revolution and to start transforming itself for the new age.
Thus, in many ways, the future will be determined by how the next Indian government comes into being and how it performs. Stability and further reforms are keenly needed to utilise these opportunities and to tackle the risks that are emerging.
From investors view point, taking a right asset allocation call at such time is the need of hour.
The strong arguments on both sides of market can confuse the best brains, hence discipline is the key.
If investor doesn’t want to indulge in a net allocation decision than for that reason, we believe that Balanced Advantage fund(BAF) can be of high utility in this market.
BAF can make asset switches between directional equity, debt and arbitrage without losing its tax advantage and can still be flexible in utilising equity market peaks for exist; and use the market lows to enter.” said Nilesh Shah, MD, Kotak Mutual Fund.
What are Balanced Advantage Funds?
Balanced advantage funds are a category of hybrid schemes in which investment in equity/ debt is managed dynamically.
The uniqueness of this category lies in the dynamic allocation between equity and fixed income (bonds), depending on prevailing market conditions. These funds shift more money into bonds when market valuations appear expensive and do the reverse when valuations are cheap. The equity component can typically vary between 30% and 80%, though some funds do go beyond these limits.
Most of the funds also take arbitrage positions through equity derivatives. This allows the funds to keep the actual equity exposure low in a heated market, yet maintain effective equity allocation above 65% to reap tax benefits.
These make use of valuation metrics to determine the level of exposure to equities at any given point.