7 Benefits of Balanced Advantage Funds for Your Portfolio
By Akhil Chugh
Date December 24, 2023
In the dynamic realm of financial markets, investors often grapple with balancing risk and reward. Enter Balanced Advantage Funds a strategic investment approach designed to offer stability and growth regardless of market fluctuations. Also known as Dynamic Asset Allocation Funds, they have gained prominence for their unique methodology, blending equity and debt investments to navigate market dynamics.
The core principle involves dynamic asset allocation, with fund managers using market indicators and advanced algorithms to optimize the mix of equities, arbitrage, and debt instruments. This adaptive strategy aims to capture growth in bullish markets and safeguard against downturns in bearish markets.
To understand the significance of investing in balanced advantage funds, let’s understand Balanced Advantage Fund (BAF) in detail.
Understanding Balanced Advantage Funds
Balanced Advantage Funds are versatile hybrid mutual funds that diversify across asset classes such as equity and fixed-income securities. Also known as Dynamic Asset Allocation Funds, these funds strategically manage exposure to equity, arbitrage, and debt instruments through a predefined investment model. The allocation to different asset classes is determined by market valuation parameters like price-to-earnings ratios and price-to-book value. With equity allocation ranging from 20% to 80% based on market valuations, Balanced Advantage Funds were introduced following SEBI norms, offering flexibility without minimum exposure limits or caps.
Balanced Advantage Funds aim to enhance investor experience by skillfully navigating market volatility. Their primary goal is to capitalize on market upswings while mitigating the impact of downturns, providing investors with a smoother investment journey.
Reasons to Invest in Balanced Advantage Funds:
In a volatile market, Balanced Advantage Funds (BAFs) harness volatility as a growth tool, offering an effective investment strategy. This hybrid investment avenue combines market-linked returns from equity with the stability of regular income from debt. Here are key reasons to consider BAFs:
1. Hybrid Fund for Wealth Creation:
- BAFs are hybrid funds, investing in a blend of equities, debt, and arbitrage opportunities.
- The equity component aims for long-term wealth creation, while the debt component provides stability during market downturns.
- Asset allocation is dynamic, adjusting between 20% and 80% in equities based on prevailing market conditions.
2. Dynamic Allocation To Beat Volatility
- BAFs stand out with dynamic asset allocation, adapting to market valuations for optimal returns.
- Unlike static asset allocation rules of other funds, BAFs can tactically shift between asset classes, offering risk-adjusted returns.
- Market timing becomes less crucial, as BAFs automatically rebalance assets based on market conditions.
3. Diversified Portfolio for Risk Mitigation:
- Within equity allocation, BAFs diversify investments across large-cap and mid-cap stocks.
- This approach mitigates concentration risks and provides investors with a risk-adjusted return.
4. Taxation Efficiency:
- Not only do Balanced Advantage Funds make your asset allocation automatic, they also do it in a more tax-effective manner than what investors can do at an individual level.
- When investors manually move their money between equity and debt, they could be subjected to taxes on the capital gains made in the short term. However, Balanced Advantage Funds are structured in a manner where the fund moves between two asset classes as a part of their routine rebalancing. It is not liable for taxes.
- Only when an investor is selling the final sales proceeds are taxable in the hands of the investors.
- Furthermore, even after the rebalancing, the tax treatment of the fund continues to remain equity-oriented, which is ultimately beneficial for investors, as equity funds pay a lower tax rate than debt-oriented funds.
5. No exit load for Flexible Investing:
- BAF can shift between asset classes within the scheme without incurring exit loads.
- BAFs provide flexibility in investment choices, enhancing investor control.
6. Long-term Focus for Compounding Benefits:
- BAFs encourage a long-term perspective, advocating staying invested through market cycles.
- This approach can lead to compounding benefits over time.
7. Smoother returns Through Dynamic Strategies:
- BAFs’ dynamic nature leads to smoother returns compared to traditional equity funds.
- Shifting between asset classes helps minimize the impact of market volatility, offering more consistent performance.
Key Takeaways from Net Brokers:
- Often dubbed as the “all-season” funds, Balanced Advantage Funds (BAFs) demonstrate resilience to market volatility.
- Optimal results, however, are realized with a commitment to a long investment horizon.
- If you are a new investor unwilling to withstand present-day market volatility, Balanced Advantage Funds are ideal for you. These asset allocation funds can serve as risk-adjusted solutions.
- Balanced Advantage Funds stand out as the preferred mutual fund category for passive investors. This category eliminates the need for frequent rebalancing, providing a hassle-free investment experience.
- Invest in Balanced Advantage Fund with an investment horizon of at least 5 years to earn the desired returns from your mutual fund investments.
Explore the stability and suitability of Balanced Advantage Funds, tailor-made for investors seeking resilience, risk-adjusted solutions, and a hassle-free investment journey.
Reach out to the Net Brokers team for assistance in understanding the risk characteristics of a scheme or evaluating your risk profile. Ensure your investment decisions are well-informed, aligning with your risk appetite and investment objectives.
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