Achieve Retirement Goals Through Balanced Advantage Funds

Retirement planning should be a planned activity. The corpus to be generated for retirement should have both growth and stability which comes from exposure to equity and debt. When approaching retirement, the risk appetite should be lower and hence the allocation to equities should be cautiously calibrated. The ability and willingness to manage asset allocation between equity and debt to manage portfolio risk and switch between the asset classes on the basis of attractive investment opportunities available is crucial for long-term retirement planning. This is where balanced advantage or dynamically managed asset allocation schemes can be helpful. This category of Hybrid Funds actively manages exposure to either of the asset classes with regards to the evolving market conditions.

Embedded Asset Allocation & Diversification

By investing in balanced advantage funds (BAFs), an investor’s investment will always be spread across two asset classes – debt and equity. Within these, there is ample diversification as the fund has the flexibility to invest across large, mid and smallcaps. Similar is the case when it comes to debt. Furthermore, the allocation proportion is actively managed. When equity valuation rises, profits are booked and the same is parked in debt. On the other hand, if the equity valuation becomes cheap, the allocation is increased. As a result, the risk aspect is contained well, which makes the fund ideal for retirement planning. 

Overcoming Behavioural Biases

Very often investors fall into the trap of their own biases. For example, when the equity market is on an uptrend, investors find it difficult to book profits as they fear of missing out on further gains in the market. Similarly, when there is a market correction, investors are unable to add to equities owing to the fear that the markets may correct more. In this manner, greed and fear stop an investor from taking optimal decisions. By investing in a BAF, the fund manager will execute the required rebalancing. To take optimal asset allocation calls, some of the fund houses rely on in-house models to eliminate every form of human bias possible. 

Better Downside Protection

While planning for retirement, the need for better downside protection cannot be overstated. By the very construct of the fund, BAFs enable superior downside protection at all times. The calibrated equity exposure ensures that the investor gets the opportunity to participate in the upside of the equity market and the wealth creation journey remains on track. In fact, BAFs have a better return per unit of risk taken in the portfolio. So, if you are investor who is looking for an offering with limited volatility, BAF can be your ally.

Tax Optimisation

Since all allocation changes happen within the fund itself and investors don’t need to take any action or undertake any transactions, investors do not face a taxation issue when the fund is rebalanced. Just like any other mutual fund category, taxation arises only at the time of redemption. So, if you are an investor who is a decade away from retirement and wishes to aggressively save up to create a nest egg or if you are an investor who is averse to equities because of its volatile nature, BAF can be very helpful in both the cases. BAF will ensure that while there is a wealth creation element through equities, the presence of debt ensures ample downside protection, making it a win-win scenario for investors.

In effect, BAF offers a combination of potential capital appreciation, capital preservation and volatility control. Thanks to the popularity the category has garnered over the past few years, almost every other fund house has a BAF offering today. If you are looking at using BAF for retirement planning, the ideal approach will be to invest using the ‘freedom SIP’ feature. Freedom SIP is a blend of two investment tools — SIP and SWP – and follows a three step approach.

It grows your wealth through SIP route over the chosen SIP tenure, switches to a target scheme post the tenure and lets investors reap the benefits as monthly income through SWP. Here, one can use BAF as the SIP fund or the target fund. The SWP amount is designed in multiples of the SIP amount and continues till your accumulated units last. The entire process is seamless and hassle-free, saving a lot of your energy and time when it comes to investment management. It ensures you have a monthly secondary income flowing in which can be utilised to meet various expenses during retirement years.

The writer is Managing Partner, Finedge Services LLP. ■ Email : wecare@finedgeservices.com ■ Website : www.finedgeservices.com