Reducing portfolio volatility with balanced advantage funds

Volatility is a part of the market and holds great importance among investors. The unpredictability of the market brings both opportunities and concerns. While some investors see a volatile market as an opportunity to gain high returns, others may react impulsively, as not everyone can digest sudden high fluctuations in the market. Balanced advantage funds (BAFs) offer a solution to handle these situations smartly.

A balanced fund is a hybrid mutual fund that balances the investment portfolio between equities and debt instruments. BAFs take this one step further by actively managing the asset allocation mix to reduce portfolio volatility and optimise returns. The fund manager typically decides how much to allocate towards equity and debt based on the fund’s investment objectives, risk profile, and the market.

Let’s explore how BAFs can help you create a more stable investment portfolio amidst market volatility. 

Dynamic asset allocation

BAFs don’t stick to a fixed ratio between shares and bonds. In a bull market, when equities are surging or becoming overvalued, the fund may shift its focus towards bonds to reduce exposure to potential downturns. Conversely, in a bear market, when equities are struggling, the fund may buy more stocks to capitalise on their lower prices.

Let’s consider a scenario where the Nifty 50 is on a strong upward trend and becomes overvalued. In such situations, BAFs might reduce their equity allocation from, say, 70% to 50% and increase their bond allocation. This strategic shift helps mitigate the risks associated with a sudden market reversal.


BAFs inherently maintain a diversified portfolio by investing in both equities and fixed-income instruments. This approach lessens the impact of extreme market events or volatility on your portfolio.

Suppose if the equity segment of the market falls by 20%, but the debt segment gains by 10%, the overall impact on a diversified portfolio would be considerably less damaging than an all-equity portfolio. The bonds in the portfolio will serve as a cushion against heavy losses.

Auto rebalancing strategy

You don’t have to stress about when to buy or sell your assets. The fund manager does that for you. Through active portfolio management, asset allocation gets reviewed and readjusted regularly. Such dynamic strategies position the balanced advantage fund strategically to capitalise on the current market conditions.

For example, if interest rates in India rise, bond prices generally fall. In such a situation, fund managers might rebalance the portfolio by reducing the allocation to bonds and shifting towards equities, which could benefit from higher interest rates in certain cases.

Better risk assessment

Fund managers use data analytics and predictive models to assess market trends. This systematic and data-driven approach aids in more accurate decision-making, leading to a portfolio that can handle market volatility better.

For example, by closely monitoring economic indicators like GDP growth, inflation rates, and foreign direct investment (FDI) trends in India, fund managers can make calculative decisions about asset allocation.


Balanced advantage funds | Investing in stability and growth

With features like dynamic nature, inherent diversification, active rebalancing, bond cushion, and data-driven decision-making, BAFs provide multiple layers of protection against market volatility. The result is a resilient portfolio that can handle the market’s ups and downs, helping investors achieve their financial goals more efficiently. Remember that while no investment comes without risk, a well-researched BAF minimises it effectively.

For a disciplined approach and leveraging rupee cost averaging, you can set up a Systematic Investment Plan in BAFs and invest fixed and manageable sums. Make sure to use an SIP mutual fund calculator to project your future gains. They offer clarity, help set realistic goals, aid in the right SIP fund selection, and manage risks effectively for a financially secure future.