Many mutual fund advisors have been recommending balanced advantage funds to new and inexperienced investors for a while now. These advisors believe that these schemes are ideally placed to take care of the current market conditions because of their dynamic portfolio. Advisors are also recommending these schemes to investors to park their lumpsum amounts.

Balanced advantage funds invest in a mix of stocks, debt, and arbitrage opportunities. These funds decide their equity exposure depending on key market ratios or in-house parameters. They invest less in stocks when the market is very high or valuations are stretched. They invest more in equity when stocks are available at attractive valuations. In short, BAFs do the job of juggling equity exposure for investors.

Sure, these funds limit equity exposure based on valuations, but that doesnt make them totally safe. Don’t be under the illusion that balanced advantage funds are a safe investment. In fact, many mutual fund distributors make such claims. However, don’t be influenced by such talk. Any mutual fund scheme that invests in stocks can’t be considered as safe. It also cannot avoid volatility and losses totally. So, invest in balanced advantage funds only if you can tolerate the risk of investing in stocks. Also, invest only if you have an investment horizon of at least five years.

Is there anything else you should keep in mind while investing in these schemes? Yes, you should make sure the scheme is practising what it claims to be. Make sure the scheme is rebalancing the portfolio in a timely manner. For example, there are schemes that invest heavily in stocks even when the market is at a higher level or at expensive valuations. You have to make sure that you don’t get into such schemes.