Balanced advantage funds are a type of hybrid mutual fund designed to adapt to changing market conditions by adjusting their investments in equity and debt. They are also known as Dynamic Asset Allocation Funds. The most important thing about such funds is that they provide a balanced risk-return profile.
Let’s understand what they are and their benefits. But before that let’s see how SEBI categorises different hybrid funds.
SEBI Categorisation of Mutual Fund Schemes
The Securities and Exchange Board of India (SEBI) introduced a standardised classification for mutual funds in 2017 to improve transparency to the mutual fund industry. Mutual funds are now categorised into:
- Equity Schemes: Funds primarily invest in stocks.
- Debt Schemes: Funds invest in fixed-income instruments like corporate bonds and government securities.
- Hybrid Schemes: A mix of equity and debt investments.
- Solution-Oriented Schemes: Funds with specific goals like retirement or education.
- Other Schemes: Includes index funds, exchange-traded funds (ETFs) and fund-of-funds.
Further, hybrid funds are categorised into the following types:
| Conservative Hybrid Fund | 10% to 25% investment in equity & equity related instruments; and 75% to 90% in Debt instruments. |
| Balanced Hybrid Fund | 40% to 60% investment in equity & equity related instruments; and 40% to 60% in Debt instruments. |
| Aggressive Hybrid Fund | 65% to 80% investment in equity & equity related instruments; and 20% to 35% in Debt instruments. |
| Dynamic Asset Allocation or Balanced Advantage Fund | Investment in equity/ debt that is managed dynamically (0% to 100% in equity & Investment in equity related instruments; and 0% to 100% in Debt instruments). |
| Multi Asset Allocation Fund | Investment in at least 3 asset classes with a minimum allocation of at least 10% in each asset class. |
| Arbitrage Fund | Scheme following arbitrage strategy, with minimum 65% investment in equity & equity related instruments. |
| Equity Savings | Equity and equity related instruments (min.65%); debt instruments (min.10% and derivatives (min. for hedging to be specified in the SID). |
Source: SEBI
Under the hybrid category, balanced advantage funds stand out due to their flexibility in asset allocation. SEBI defines them as schemes that dynamically allocate assets between equity and debt, with no fixed allocation limits. Hence the name ‘Dynamic Asset Allocation Funds.’
What Are Balanced Advantage Funds?
Balanced advantage funds are hybrid funds that shift their allocation between equity, debt and arbitrage based on market conditions. The aim is to maximise returns while controlling risks. These funds increase equity exposure when markets are undervalued and reduce it when valuations are high. This give a dynamic advantage in investing.
What are the Features of Balanced Advantage Funds?
1. Dynamic Asset Allocation
Fund managers actively adjust the proportion of equity and debt in the portfolio based on market conditions. For example, when equity markets are overvalued, the fund may shift toward debt to mitigate risk and vice versa during undervalued phases.
This strategy helps investors avoid the downfalls of market timing while maintaining exposure to growth opportunities.
2. Diversification
Balanced advantage funds invest in multiple asset classes, like equities and fixed-income instruments. However, they also include arbitrage opportunities. This diversification reduces the overall portfolio risk by balancing high-growth equity investments with debt instruments.
3. Automatic Rebalancing
The fund’s portfolio is periodically rebalanced to maintain the asset allocation that is best for you. For example, if during a recovery in equity markets, the fund increases the equity exposure beyond the target level, the fund may sell equities and shift to debt to restore balance.
4. Tax Efficiency
Balanced advantage funds with at least 65% equity allocation are treated as equity-oriented funds for taxation purposes. Therefore, you can benefit from a lower tax treatment than debt funds, like in case of lower long-term capital gains tax.
5. Reduced Volatility
These funds put the ‘dynamic’ in ‘Dynamic Asset Allocation Funds.’ Hence, they reduce portfolio volatility. This makes them less risky compared to pure equity funds, especially during market falls and market dips.
Why Invest in Balanced Advantage Funds?
1. Lesser Risky Profile
If you are someone looking for a middle ground between equity funds and debt funds, balanced advantage funds could be your top choice. They are less volatile than pure equity funds and offer higher growth in returns than fixed-income investments. Plus, if you are a first-time investor, balanced advantage funds are the one for you.
2. No Need to Time the Market
There is no need to time the market and wait for the market to turn red or green. The dynamic allocation reduces the need for investors to time the market, making such funds a hands-off investment option.
3. Consistent Returns
By balancing growth and stability in returns, these funds ensure steadier returns than than pure equity mutual funds.
What are the Things to Consider before Investing in Balanced Advantage Funds?
Even though investing in balanced advantage funds is one of the best ways to diversify your funds, but there are some things that you should be aware before you start investing in them. Here are the things you should consider before investing:
1. Fund’s Objective
Such funds dynamically adjust their equity and debt allocation based on market conditions.
Their sole goal is to provide more stable returns during market volatility while limiting it downside risk.
2. Less Risky but still Risky
While less risky than pure equity funds,they still carry equity market exposure and are subject to volatility. So, before investing, you must check the degree of risk and the variability in returns.
3. Expense Ratio
Next, the most important is the fund’s expense ratio, which can affect net returns of any mutual fund. Which is why you must opt for funds with a lower expense ratio to maximise gains.
Start investing in index funds.
4. Exit Load and Liquidity
You must also check for any exit load charges as per your investment time period. Lastly, make the fund offers sufficient liquidity as per your financial goals.
Top Balanced Advantage Funds in 2024
Here are the top balanced advantage funds according to their 1-year returns as of 20th December 2024.
| Scheme Name | AUM (₹ in crore) | 1-Year Returns (%) | TER (%) |
|---|---|---|---|
| Quant Dynamic Asset Allocation Fund | 1,341 | 27.40 | 0.65 |
| Axis Balanced Advantage Fund | 2,599 | 21.83 | 0.83 |
| WhiteOak Capital Balanced Advantage Fund | 1,273 | 20.78 | 0.52 |
| Invesco India Balanced Advantage Fund | 1,273 | 20.78 | 0.52 |
| HDFC Balanced Advantage Fund | 926 | 20.34 | 0.83 |
| HSBC Balanced Advantage Fund | 95,570 | 20.19 | 0.74 |
| Baroda BNP Paribas Balanced Advantage Fund | 1,523 | 19.21 | 0.76 |
| Franklin India Balanced Advantage Fund | 4,213 | 19.06 | 0.72 |
| Mahindra Manulife Balanced Advantage Fund | 2,428 | 18.82 | 0.46 |
| Bandhan Balanced Advantage Fund | 904 | 18.41 | 0.56 |
Source: Value Research
Wrapping Up
Balanced advantage funds scream diversification from all sides. Such funds are a great investment option for those looking for moderate risk and diversified growth. Their dynamic asset allocation and tax efficiency makes them suitable for a wide range of investors.
FAQs
What are balanced advantage funds?
Balanced advantage funds dynamically allocate assets between equity and debt to balance risk and return.
How do BAFs differ from other hybrid funds?
BAFs have no fixed asset allocation limits, unlike other hybrid funds which have to adjust based on market conditions.
Are balanced advantage funds risky?
While less risky than pure equity funds, BAFs still carry market risks due to their equity exposure.
What is the tax treatment for BAFs?
Funds with at least 65% equity allocation are taxed as equity funds. Thus, they offer lower long-term capital gains tax.
Can I invest in balanced advantage funds through SIPs?
Yes, you can invest in balanced advantage funds through a systematic investment plan (SIP).
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