BAF, Don’t Blink: Why Balanced Advantage Funds reward the patient

Balanced Advantage Funds (BAFs) dynamically adjust their equity and debt allocation based on market conditions.

The financial markets have been through a roller-coaster ride over the past few months. In September 2024, the bourses peaked, reaching new highs. However, from October 2024 to March 2025, they saw a significant correction of approximately 20 percent. As of April 2025, signs of recovery have begun to surface.

One noticeable trend during this period is the increase in equity allocation in Balanced Advantage Funds (BAFs). Many investors are questioning why fund managers are raising their exposure to equities in such volatile times. But there's no need for concern, for the reasons enumerated below.

How BAFs work

BAFs dynamically adjust their equity and debt allocation based on market conditions. The goal is simple: increase equity exposure when markets are down (cheaper valuations) and reduce it when markets are high (expensive valuations).

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This makes BAFs a risk-managed investment rather than a speculative bet. While valuing equities, instead of gut-feel  or emotions, they use proper valuation methods  such as:

1. Price-to-Earnings (P/E) ratio: when markets are expensive, P/E ratios tend to be high. When they correct, the ratios drop, signalling better valuation.

2. Price-to-Book (P/B) ratio: similar to P/E, this metric helps assess whether a company is over or undervalued.

3. Market sentiment indicators: fear and greed cycles influence stock prices. Typically, markets peak when investors are overly optimistic and bottom when fear is at its highest.

4. Earnings growth: if corporate earnings continue to grow despite a market correction, it suggests that the decline is due to sentiment rather than fundamental weakness.

A great way to understand why increasing equity allocation during corrections is a smart strategy is to look at past market trends. Over the years, markets have faced multiple corrections but have always recovered strongly.

2018 market correction: the Nifty fell nearly 15 percent due to global trade war fears, but rebounded quickly in 2019, reaching new heights.

2020 Covid crash: in March 2020, markets crashed over 30 percent in a matter of weeks, but by the end of the year, the NIFTY had recovered completely and continued to rally.

2022 Russia-Ukraine crisis: the markets saw another sharp correction in early 2022, but bounced back within months as economic conditions stabilised.

These examples highlight that corrections are temporary and recoveries often happen sooner than expected. Fund managers recognise this and use corrections as an opportunity to buy quality stocks at lower prices before the next rally.

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Since October 2024, markets have corrected significantly, presenting a buying opportunity. A 20 percent drop from the peak means stocks are available at a discount compared to their previous highs. For long-term investors, this is an opportunity to accumulate quality equity at attractive prices.

Let’s take a look at some key BAFs:

This method leads to a successful investing strategy which buys low and sells high, and not the other way around.

Stay calm and invest, because...

1. Equity markets reward long-term plays. Short-term volatility is part of the game, and historical trends show that markets recover and go on to hit new highs
over time.

2. Fund managers use data-driven strategies. They increase or decrease equity allocations based on valuation models, not emotions.

Also read | Equity fund managers stay cautious, hold elevated cash level despite market rebound

3. BAFs rebalance automatically. This ensures that investors do not have to time the market themselves.

For all the above reasons, instead of panicking, one should stay invested and trust the dynamic asset allocation model that these funds follow.

The author is the founder of Money Honey Financial Services Ltd

Disclaimer: The views expressed by experts on Moneycontrol are their own and not those of the website or its management. Moneycontrol advises users to check with certified experts before taking any investment decisions.