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Flexibility and Smart Diversification: The Key to Balanced Funds

April 26, 2021

Flexibility and Smart Diversification: The Key to Balanced Funds

Equities represent an investment portfolio with very high volatility. Over recent days, this volatility has been particularly pronounced. The Indonesia Stock Exchange Index (IHSG) experienced a correction, approaching the 5,800 level in April 2021. One of the reasons was negative sentiment from global investors regarding expectations that US inflation would exceed forecasts.

However, on Thursday (15/4), the IHSG continued to strengthen. On Thursday, the IHSG gained 0.48% or 29.22 points to the level of 6,079.5.

Amid market fluctuations, flexibility in diversification is essential. This is where the strength of Balanced Funds lies.

In mutual fund investing, investors typically spread their funds across several different types of mutual funds. The aim is to keep investment returns stable. However, with Balanced Funds, investors already gain diversification across three types of instruments within a single product. Everything is managed by the Investment Manager. Therefore, Balanced Funds represent a more practical diversification option for investors.

This flexibility differs from other types of mutual funds, which have minimum requirements for investing in instruments according to their fund type. As a result, the flexibility of the Investment Manager is reduced, which is one reason why many mutual funds struggle to outperform indices.

In addressing market volatility, Investment Managers see a need for asset diversification, so that investors can be protected when high volatility occurs in the equity market. "We conducted simulations of diversified portfolios over the last ten years. Asset class diversification has proven to deliver better performance compared to equity investment (LQ45). Regardless of the size of the allocation to equities, bonds, and money market instruments, all three scenarios delivered performance above both equity indices and deposits," explained Fajar R Hidayat, President Director of Syailendra Capital.

Balanced Funds have balanced allocations across each instrument, whether equities, bonds, or money market instruments. As a result, the Investment Manager can flexibly manage instrument allocation. For example, when the equity market is bullish, most of the funds will be allocated to equities or bonds, and vice versa.

With the flexibility that Investment Managers can apply to Balanced Funds, they can implement more flexible strategies so that the fund's performance can outperform the benchmark index. This means the Investment Manager can actively adjust the asset allocation strategy according to market developments.

Yes, Balanced Funds can be an option for investors. Investment Managers have the freedom to shift allocations to different asset classes according to market conditions. Balanced Funds can invest in equity securities and/or debt securities with allocations in equities (10% - 75%), bonds (10% - 75%) and money market instruments (2% - 75%).

The flexibility that Balanced Funds offer is not available to other mutual fund types, which have minimum requirements for investing in instruments according to their fund type. As a result, the flexibility of Investment Managers is reduced, and this is one reason why many mutual funds struggle to outperform indices.

Unlike other mutual fund types, Balanced Funds, with their flexibility, are able to cushion against return declines when the portfolio is in a bearish cycle. Conversely, returns can soar significantly when the portfolio is in a bullish cycle.