Just as the hybrid work culture has become a new-normal post-pandemic, hybrid funds<\/a> such as Balanced Advantage Funds<\/a><\/strong> (also known as Dynamic Asset Allocation Funds<\/strong>), are getting the attention of late.<\/p>\n\n\n\n This article includes<\/strong><\/p>\n\n\n\n What are Balanced Advantage Funds or Dynamic Asset Allocation Funds and where do they invest?<\/em><\/strong><\/p>\n\n\n\n As the name suggests, Balanced Advantage Fund\/Dynamic Asset Allocation Funds have the investment mandate to manage their assets dynamically between equities and debt instruments, (depending on the market conditions and opportunities and threats playing out for the respective asset class); there is no fixed range for asset allocation. In other words, the allocation could swing between equity and debt contingent on the outlook for the respective asset classes.<\/p>\n\n\n\n That said, going by experience, most Balanced Advantage Funds<\/a> usually tend to maintain a minimum 65% exposure to equities to enjoy the favourable tax status (of an equity-oriented fund) — except in circumstances when the equity market is at a lifetime high and the fund manager believes valuations look a bit stretched.<\/p>\n\n\n\n Besides, Balanced Advantage Funds\/Dynamic Asset Allocation Funds may invest a small portion in Infrastructure Investment Trusts (InvITs) and Real Estate Investment Trusts (REITs). For hedging purposes and to take advantage of arbitrage opportunities, at times such funds may also invest in derivatives.<\/p>\n\n\n\n So, Balanced Advantage Funds\/Dynamic Asset Allocation Funds tactically hold a well-diversified portfolio of equities and equity-related instruments and debt & money market securities.<\/p>\n\n\n\n Why it makes sense to invest in Balanced Advantage Funds\/ Dynamic Asset Allocation now?<\/em><\/strong><\/p>\n\n\n\n As you may know, the global economy is passing through a challenging phase at present. Inflation<\/a> is spiralling, the central banks (across most parts of the world) have raised their policy interest rates quite dramatically this year to tame inflation, and owing to synchronised rate hikes, World Bank and the International Monetary Fund (IMF) have warned of a global recession in 2023.<\/p>\n\n\n\n The U.S. Federal Reserve (Fed)<\/a> staff economists have observed that the odds of the U.S. economy witnessing a recession next year, i.e. 2023, is almost 50%. Sluggish growth in consumer spending, tightening financial conditions, and deteriorating global outlook, are the salient downside risk according to the Fed staff. Similarly, the European Commission’s autumn economic forecasts<\/a> that the eurozone and most member states could head into a recession in the last quarter of 2022.<\/p>\n\n\n\n And as you know, when the west sneezes, the world catches a cold<\/em>. I believe India, may not remain fully immune to global macroeconomic conditions. The impact would be seen on the Indian economy, wherein it could have a bearing on consumer sentiments and business confidence. Credit growth, which touched a 9-year high in Q2FY23, and a strong capex cycle guided by multi-year expansion plans of leading corporate houses may come down the pike. Certain capital-intensive sectors and companies within those, particularly the ones with high debt, may take a hit; their corporate earnings will be impacted. Similarly, unstable geopolitical conditions and disrupted supply chains may make matters worse. Also, anticipated recession in the major economies of the world can potentially dampen the prospects of Indian exports. So, in general, the near-term corporate earnings may be toned down.<\/p>\n\n\n\n According to the RBI<\/a> Governor, Mr Shaktikanta Das, India is unlikely to face a recession like in some of the advanced economies (where the central banks have raised the policy interest rate aggressively to control inflation). He remains optimistic about the prospects of the Indian economy and its capacity to deal with the current and emerging challenges. It is this optimism as well as the fact that India is one of the fastest-growing economies that has attracted investors.<\/p>\n\n\n\n But you need to recognize that the Indian equity market is at a lifetime high, and valuations appear to be at a meaningful premium relative to the global equity markets. Therefore, one needs to approach equities carefully and tactically now as external vulnerabilities are at play — the markets could turn very volatile in time to come.<\/p>\n\n\n\n Against this backdrop, taking appropriate exposure to Balanced Advantage Funds\/Dynamic Asset Allocation Funds<\/a> shall help you manage the allocation between equity and debt dynamically with a competent fund manager\/s and generate better risk-adjusted returns.<\/p>\n\n\n\n Certain Balanced Advantage Funds\/Dynamic Asset Allocation Funds have been able to manage the downside risk better in the bear phases of the markets in the past.<\/p>\n\n\n\n Table 1: Performance of Dynamic Asset Allocation\/Balanced Advantage Funds in bearish phases<\/em><\/strong><\/p>\n\n\n\n