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The Investment case for Balanced Funds

A general tendency of Indian investors is to invest in equity when the markets are surging high, while pull out money when the markets are underperforming- which may not necessarily lead to the best investment experience. Also, more often than not, in times of market volatility some investors either stay put or panic-sell their investments.

This lack of confidence could arise of out their bleak understanding of equity as an asset class. It is apt to mention here, that equities is a suitable investment for long term wealth creation. One should ride the short-term volatility with patience in order to benefit from the potential capital appreciation in the long-term.

Now with equity markets perched at record highs, certain segment of investors must be waking up to realize that they have been bereft of the upside so far. It may be a prudent strategy to add flavor of balanced funds. These funds seek to capture upside by increasing allocation to equity when the markets are declining, and limits downside by reducing exposure to equities when markets are risingcompletely reverse of what retail investors normally do.

ICICI Prudential Balanced Advantage fund is an interesting offering in this space. Also for Investors who do not wish to take too much risk, but wish to have exposure into equities, balanced funds are a good way forward. These funds are less volatile, and when the markets fall, they are less hurt than others.

Adherence to asset allocation model

Investing in balanced funds, offers the benefits of asset allocation model in a single structure. Adhering to asset allocation, spreads investments across more than one asset class thereby reducing risks and moderating the effect of an individual asset class on the overall portfolio performance. It also instils discipline in investing and helps avoid the tendency to redeem at market bottoms and invest at market tops.

However, managing debt and equity separately could be a tedious task involving churning costs, tax implications and expertise. Further, one may not be able to tactically adjust allocations to market movements. Balanced funds offer the growth of equity and the stability of debt. This diversification protects the portfolio from downside risks if either equity or debt enters a bearish phase.

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