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.
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.
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?
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:
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.
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.
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.
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.
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:
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.
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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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|
In India, balanced advantage funds are considered equity funds for the sake of taxation. The tax implications are as follows:
Investors should consider assessing the following factors before investing in balanced advantage funds:
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.
Ans. Yes, balanced advantage funds can invest in foreign securities. They can invest in an array of securities such as American Depository Receipt, Global Depository Receipt and foreign securities. This also includes overseas ETFs as well as debt securities; however, there’s a maximum limit set, which is 20% of the fund’s net assets.
Ans. Here is a list of some of the top balanced advantage funds that you can invest in 2022:
HDFC Balanced Advantage fund
Nippon India Balanced Advantage fund
Invesco India Dynamic Equity Fund
ICICI Prudential Balanced advantage fund
L&T Dynamic Equity Fund
Ans. Balanced advantage funds are suitable for all types of investors. It can be recommended to novice and risk-averse investors, but they are also free to make their own investment choices. The same is applicable to all other types of investors.
Ans. Yes, you can invest in a dynamic asset allocation fund through the lump-sum method. Although SIP is a preferable way of investment for many investors as it is more affordable, the choice is totally up to the investor.
Ans. Balanced advantage funds utilise factors such as interest rates, valuations and other macro indicators to determine market valuations. When the market valuations are on the low side, they invest more in equities and more in debt securities when market valuations are high.
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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.
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