7 Reasons to Invest in Balanced Advantage Funds
By Akhil Chugh
Date August 27, 2023
In the ever-fluctuating world of financial markets, investors often find themselves grappling with the challenge of balancing risk and reward. This is where Balanced Advantage Funds come into play as a strategic investment approach that aims to provide stability and growth, regardless of market conditions.
Balanced Advantage Funds, also known as Dynamic Asset Allocation Funds, have gained significant traction in recent years due to their unique methodology of adapting to market dynamics. These funds combine the features of both equity and debt investments, aiming to capitalize on market opportunities while mitigating risks.
The core principle behind Balanced Advantage Funds revolves around dynamic asset allocation. Fund managers leverage market indicators and sophisticated algorithms to determine the optimal allocation between equities, arbitrage and debt instruments. In bullish markets, a higher equity exposure seeks to capture growth potential, while in bearish markets, the fund shifts toward debt to safeguard against downturns.
To understand the significance of investing in balanced advantage funds, let’s understand Balanced Advantage Fund (BAF) in detail.
What are Balanced Advantage Funds?
Balanced Advantage Funds are a type of hybrid mutual fund investing in more than one asset class (e.g., equity, fixed income securities, etc). Balanced Advantage Funds are also called Dynamic Asset Allocation Funds as BAFs manage their exposure to equity, arbitrage & debt instruments based on a pre-defined investment model where exposure to different asset classes is defined based on market valuation parameters like price to earnings ratios, price to book value, etc. Equity Allocation ranges from 20% – to 80% based on market valuations. The category was created based on new norms from the Securities and Exchange Board of India (SEBI) and is free of any minimum exposure limits or caps from the same.
The primary objective of Balanced Advantage Funds is to navigate market volatility and provide investors with a smoother investment experience by capitalizing on market upswings while cushioning the impact of downturns.
7 Key Reasons to Invest in Balanced Advantage Funds:
Markets are volatile and Balanced Advantage Funds (BAFs) use this volatility as their growth tool through an effective strategy. Equity offers market-linked returns and debt offers a regular income. In the long term, investors must be willing to take risks to earn from equities while aiming at fixed income. Dynamic asset allocation funds are a good choice for effective wealth creation planning.
Some of its key benefitd are:
1. Hybrid Fund
Balanced Advantage Funds are types of Hybrid funds investing in a mix of equities, debt and arbitrage opportunities. The equity component helps to create wealth in the long run while the debt component provides safety during the market downturn giving steady returns. Equity and fixed-income exposures in Balanced Advantage Funds are usually decided by the asset allocation model of the funds under a prevailing market condition.
Balanced Advantage Funds usually manage an equity allocation between 20% and 80% as per the market valuations. In doing so, Balanced Advantage Funds invest predominantly in stocks and other equity-related instruments to gain appreciation in the equity market.
Usually, the debt component is capped at 35% to ensure the taxation is as per the norms of equity funds. However, the debt exposure may be increased if markets are expected to crash.
The arbitrage component is the completely hedged equities that are not exposed to market risks. Depending upon the investment model of each fund, the fund can tactically take duration and credit calls to benefit from higher interest coupons and price fluctuations, which further contribute to the fund’s performance.
2. Dynamic Allocation – To Beat Volatility
Most hybrid funds have to follow a static asset allocation rule as mandated by SEBI. Hence, they have a limitation on adding equity or debt components to the portfolio. However, Balanced Advantage Fund is a dynamic asset allocation fund that can dynamically change the asset class investment as per the market valuations. This helps in tapping the high returns of the equity markets along with the security of debt instruments. It has unique in-built re-allocation tactics to give risk-adjusted returns. It also saves you from timing the market to make investments in these funds because they rebalance the assets as per the market conditions to make the most out of the market cycle.
3. Diversified Portfolio
Within equity asset allocation, Balanced Advantage Funds spread the investment over large-cap and mid-cap stocks. They ensure large companies’ stability and benefit from medium-sized company’s growth potential simultaneously. This saves from the concentration risks of the equity markets and helps offer investors a risk-adjusted return.
4. Taxation
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:
There are no exit loads for shifting from one asset class to another within the scheme. There are several options available to the investor when it comes to investing in these funds.
6. Long-term Focus:
Balanced Advantage Funds encourage investors to take a long-term perspective, staying invested through market cycles. This can potentially lead to the benefits of compounding over time.
7. Smoother returns:
The dynamic nature of these funds can lead to smoother returns over time compared to traditional equity funds. The strategy of shifting between asset classes helps minimize the impact of market volatility, leading to more consistent performance.
Key Takeaways from Net Brokers:
- Balanced Advantage Funds are known as– the “all-season” funds. However, while they remain unharmed by market volatility, you should only invest in BAFs if you are ready to stay invested for 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 are also the best category of mutual funds for passive investors who often do not want to rebalance their funds.
- Invest in Balanced Advantage Fund with an investment horizon of at least 5 years to earn the desired returns from your mutual fund investments.
Balanced Advantage Funds offer a multi-faceted approach to navigating market volatility. Through dynamic asset allocation, risk diversification, and professional management, these funds aim to provide investors with a smoother investment journey, cushioning the impact of market swings while striving for growth and stability.
Consult the Net Brokers team if you need any help in knowing the risk characteristics of a scheme or your risk profile. You should always make informed investment decisions based on your risk appetite and investment needs.
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