Making mutual fund choice: Multi-asset vs balanced advantage funds

Investors should pick between the two depending on their risk appetite and financial goal

Before investing in mutual funds it is important to understand the different kinds of products. Two popular funds are multi-asset allocation and balanced advantage. Here are the key differences between the two.

Multi-asset allocation funds

 

These are hybrid mutual funds designed to invest in a mix of different asset classes such as equities, bonds, and commodities. The allocation to each asset class varies based on market conditions and the fund manager's strategy. The primary objective is to achieve diversification across various asset classes and reduce the overall risk of the portfolio.

 

Features of multi-asset allocation funds

 

Adaptability to market conditions: These funds can adjust their asset allocations based on prevailing market conditions. This approach allows fund managers to navigate different market environments, reducing volatility and minimising losses during turbulence.

 

Convenience and accessibility: For investors who lack the time or expertise to manage a diversified portfolio by themselves, multi-asset allocation funds are a convenient solution. Instead of selecting and monitoring individual assets, investors can simply invest in a single fund that provides exposure to a range of asset classes.

 

Diversification: By investing across multiple asset classes such as stocks, bonds, and commodities, these funds inherently spread risk. Diversification can help smooth out fluctuations in portfolio value and reduce the impact of any single asset's poor performance on overall returns. However, it's important to note that diversification cannot completely eliminate the risk of loss, particularly in extreme market conditions.

 

Risk management: While multi-asset allocation funds aim to balance risk and return, investors should understand that they are still exposed to market fluctuations. No investment is entirely immune to volatility or downturns and investors must have realistic expectations and a long-term perspective.

 

Balanced advantage funds

 

Also known as dynamic asset allocation funds, this investment adjusts their asset allocation based on predefined valuation metrics or market indicators. The goal is to capitalise on opportunities while managing downside risk.

 

Features of Balanced advantage funds

 

Dynamic asset allocation: The ability of balanced advantage funds to vary their equity exposure in response to changing market conditions allows them to potentially capitalise on opportunities while also mitigating risk. By reducing equity exposure during periods of high market valuations and increasing it when stocks are attractively priced, these funds aim to enhance returns and manage downside risk more effectively.

 

Participation in upside potential: Investors who are looking to participate in the potential upside of equity markets but are concerned about downside risk may find balanced advantage funds appealing. These funds seek to provide exposure to equity market growth while actively managing risk through strategic asset allocation decisions.

 

Manager skill and market assessment: The success of balanced advantage funds heavily relies on the fund manager's ability to accurately assess market conditions and make timely asset allocation adjustments. Experienced and skilled fund managers can add significant value by effectively navigating various market cycles and making informed investment decisions.

 

Transaction costs and overall returns: While frequent portfolio adjustments are a feature of balanced advantage funds, they can also result in higher transaction costs. Investors should consider these costs alongside potential benefits when evaluating the suitability of these funds for their investment objectives.

 

Difference between multi-asset allocation and balanced advantage funds

 

Approach to asset allocation: Multi-asset allocation funds seek to maintain allocation to different asset classes within a specified range. Balanced advantage funds dynamically adjust their allocation based on market conditions from time to time.

 

Risk management: While both types of funds aim to manage risk through diversification, balanced advantage funds often employ tactical asset allocation strategies to minimise downside risk.

 

Investor profile: Multi-asset allocation funds are suitable for investors seeking a diversified portfolio with a long-term investment horizon, while balanced advantage funds may appeal to those looking for a more flexible approach to asset allocation with active risk management.