What are Balanced Advantage Funds? 4 Top Reasons to Invest in Them

If you are new to investing, here’s a small tip – diversify your investments across asset classes, like debt and equity to mitigate risks. This is where balanced advantage funds, also known as Dynamic Asset Allocation funds, could help you. A sub-category of hybrid mutual funds, balanced advantage funds aim to maintain a balance between returns and risk. 

So, how does a balanced advantage fund work? Should you invest in them? Let us answer your questions in the following sections.

What is a Balanced Advantage Fund?

A balanced advantage fund is a type of hybrid mutual fund that invests in both debt and equity securities without any restriction on asset allocation. 

As per SEBI guidelines, fund managers are allowed to dynamically invest 0%-100% of the assets in equity or 0%-100% of the funds in debt. They have the freedom to reallocate the assets as per market conditions and price fluctuations. 

The strategy for a balanced advantage fund is to generate maximum returns on your investments.

How do Balanced Advantage Funds Work?

Balanced hybrid funds do not have any specific limit when it comes to asset allocation. The fund managers dynamically manage the investment based on the prevailing market conditions. This requires constant observation and evaluation to generate maximum returns for the investors.  

Asset Management Companies (AMCs) engage in internal evaluations to decide whether a particular dynamic fund should bend more towards equity or debt instruments. 

This method is known as the process valuation approach or asset allocation model, which varies from one fund house to another. For example, fund managers invest more in debt when the market valuation is on the upside and in equities when the same is down. 

Most fund houses invest 65% to 80% of their assets in equities, but this can go up to 90% if the market conditions require the same.

Also Read: What are Hybrid Mutual Funds?

What are the Features of Balanced Advantage Funds?

Balanced advantage funds aim at balancing the risk and reward associated with investments made in debt and equity securities. Market-related risk and returns are strategically balanced to generate superior returns. Equity investments offer market-linked returns, and debts provide a steady income. 

Here are the key features of a balanced advantage fund:

1. Diversification

Dynamic asset allocation funds invest in the categories and sub-categories of different types of asset classes. Fund managers invest in companies of varied market capitalisations or sectors.

Simultaneously, they also invest in government bonds and treasury bills. The former provides potential to generate higher returns while the latter helps to minimise the risks.

2. Asset allocation

Balanced hybrid funds have the advantage of re-allocating assets which can save investors from massive losses. In dynamic asset allocation funds, managers can tweak the distribution of the assets to optimise return and minimise the risk level.

3. Flexibility

Most hybrid funds have pre-defined asset allocations as mandated by SEBI (Security and Exchange Board of India). However, for balanced advantage funds, the fund managers have the flexibility of investing 0% to 100% of the fund in multiple asset classes.

4. Low volatility compared to equity funds

Diversified asset allocation could help lower the volatility level of the overall portfolio. For example, if the equity market goes down, investments made in debt securities can balance the portfolio’s risk level.

Who Should Invest in a Balanced Advantage Fund?

Due to its dynamic nature, dynamic Asset Allocation funds suit a range of investors. As these funds tend to be under the active management of the fund managers, novice investors can consider investing in this fund. It can serve experienced investors as well who have long-term investment goals. 

Balanced advantage funds can be beneficial for the following types of investors:

• Investors who have long-term investment goals and want stable earnings from their investments 
• Novice investors who are not familiar with the stock market and its volatility
• Investors who do not wish to make investments in highly risky mutual funds
• Investors who can take little to moderate risk with their investments 
• Investors with an investment horizon of a minimum of 3 years to receive the benefits of compounding

Why Should You Invest in a Balanced Advantage Fund?

Out of all the different types of mutual funds out there, equity-oriented mutual funds tend to be the riskiest because they primarily invest in stocks of companies. But debt-oriented mutual funds tend to be less risky than equity funds; however, the scope of generating high returns is limited. 

Thus, if you are an investor who wishes to invest in a fund that deals with both equity and debt instruments, you can consider investing in balanced advantage funds. 

This could give you the best of both worlds – potential to generate higher returns through equity investments and mitigate risk via the less-risky debt instruments. Another fun fact about this fund – the funds are allocated and re-allocated based on the prevailing market conditions. 

What are the Risks of Investing in Balanced Advantage Funds?

Mutual fund investments are subject to market risk. Although the assets in a balanced mutual fund are strategically allocated as per the market conditions, investments made in equity-oriented instruments tend to be risky in nature. 

If the market falls and your fund manager has moved your money mostly towards equity instruments, there are chances of incurring losses on your investments. However, this risk is always a concern for almost all types of mutual funds. 

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What is the Difference between a Balanced Fund and Balanced Advantage Fund?

Here are some of the differences between a balanced fund and a balanced advantage fund:

Balanced Fund	Balanced Advantage Fund
Has a fixed allocation to both asset classes	No such fixed asset allocation or distribution percentage
Taxed as debt funds	Can be taxed both as equity and debt funds
Usually has a lower expense ratio	Has a higher expense ratio than balanced funds
Equal allocation of assets could give stable returns	Less stable than balanced funds

Taxation of Balanced Advantage Funds

In India, balanced advantage funds are considered equity funds for the sake of taxation. The tax implications are as follows: 

• If the units are held in for less than 12 months, the gains are known as short-term capital gains and taxed at 15% 
• If the assets are held for more than or equal to 12 months, the gains are called long-term capital gains. For returns of up to Rs. 1 lakh, they are tax-exempt. Returns amounting to more than that are taxed at 10% without indexation benefit

Also Read: Top 10 Large Cap Mutual Funds To Invest In 2022

Things You should Consider before Investing in Balanced Advantage Funds

Investors should consider assessing the following factors before investing in balanced advantage funds: 

• Investment horizon: Investors with an investment horizon of a minimum of 3 to 5 years might find this fund ideal as they will be able to reap the benefits of compounding. Investors with a horizon of less than that may not get a high return on investment. 
• Investment goals: Investors who do not wish to associate with high-risk funds can significantly benefit from balanced advantage funds. The long-term returns will also be taxed lower than funds that focus on fixed-income instruments.  
• Risk level: Although these funds tend to be less risky when compared to other types of mutual funds, they are not entirely risk-free. The risk level varies from moderate to low depending upon the investments made in equity. 
• Return: Return from this fund might not be as high as aggressive mutual funds. However, investors can earn a moderately higher return than debt-oriented funds.

Final Word

Dynamic allocation funds came into existence after the re-categorisation of the types of funds by SEBI and have been a popular investment choice since then. Nevertheless, investors must do thorough research and consult an expert financial advisor before going ahead with any investment decision. 

FAQs on Balanced Advantage Funds

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Disclaimer: Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.

This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.