A Comprehensive Guide on Balanced Advantage Funds

Are you looking for a mutual fund that gives you the best of both worlds — equity and debt — and adjusts its portfolio as per market conditions? If yes, balanced advantage funds should be on your radar. These funds are a category of hybrid funds. Read on to learn what makes these funds unique and their various other aspects.

What are balanced advantage funds?

Balanced advantage funds invest in equities and debt that change dynamically as market conditions change. Because of this, they are also called dynamic asset allocation funds. While the fund’s equity component helps in capital appreciation, the debt component helps protect the gains from eroding due to market volatility.

Capital market regulator SEBI allows balanced advantage funds flexibility in their investment approach. These funds can allocate anywhere between 0% and 100% of their portfolio to equity and debt, allowing fund managers to adopt a tactical investment strategy.

Asset allocation models of balanced advantage funds

Balanced advantage funds mainly deploy two types of asset allocation models. These include:

• Acyclical

Balance advantage funds deploying this model increase equity exposure in falling markets and higher debt exposure in rising markets. This approach, also known as counter-cyclical asset allocation, focuses on buying the dip.

• Cyclical

The cyclical approach is opposite to the acyclical model. Balanced advantage funds deploying this approach raise equity stakes during market highs and increase debt during drops.

Benefits of investing in balanced advantage funds

Investing in balanced advantage funds brings several benefits. These include:

• Reduced volatility

While mutual funds are subject to market risks, balanced advantage funds tend to reduce volatility by adjusting their asset allocation dynamically. This approach helps balance risks better than pure equity funds.

• Provide diversification

The importance of diversification can’t be emphasised enough. Diversification helps mitigate risks by spreading your money across equity and debt. This strategy helps reduce the impact of underperformance of any one asset class.

• Automatic rebalancing as per prevailing market conditions

Balanced advantage funds automatically rebalance portfolios according to prevailing market situations. This saves you the effort of tracking and adjusting your investments.

Taxation of balanced advantage funds

Balanced advantage funds are taxed based on their equity orientation. If the equity orientation is more than 65%, the funds will be taxed as equity funds. Therefore, long-term capital gains (LTCG) above ₹1.25 lakhs in a financial year without indexation will be taxed at 12.5%. On the other hand, short-term capital gains are taxed at 20%.

On the other hand, if the fund has a higher debt component, it is taxed like debt funds, where the gains are added to income and taxed according to your tax slab.

Who should invest in balanced advantage funds?

Balanced advantage funds are a prudent option for several types of investors. These include:

• New investors

As a new investor, you can start your mutual fund investment journey with balanced advantage funds. They expose you to equities and debt without requiring you to manage the investment.

• Investors with moderate risk tolerance

Balanced advantage funds can be a good investment choice for investors with a moderate risk tolerance. This category of investors look to take some level of risk but doesn’t prefer extreme volatility. They aim to balance potential growth with capital protection.

Identifying the top balanced advantage funds

You need to remember certain things while identifying the best balanced advantage fund. These include:

• Fund’s long-term returns

Evaluate the fund’s long-term returns across 5 or 8 years. See how consistent it has been and, more importantly, how well it has contained losses during market downturns.

• Fund manager’s track record

Analyse the fund manager’s track record and the funds managed by him / her. See the performance of the funds managed.

• Ensure the fund aligns with your goals and risk appetite

Last but not least, make sure the fund aligns with your goals and risk tolerance. This ensures money is available to you at the right time when needed.

Wrapping it up

Balance advantage funds can help balance risk and reward by employing dynamic asset allocation. That said, it’s crucial to ensure that the fund fits into your overall financial objectives. Start small and see how the fund performs before committing big.

Disclaimer: This article is for informational purposes only and does not constitute financial advice. It is not produced by the desk of the Kotak Securities Research Team, nor is it a report published by the Kotak Securities Research Team. The information presented is compiled from several secondary sources available on the internet and may change over time. Investors should conduct their research and consult with financial professionals before making any investment decisions. Read the full disclaimer here.

Investments in the securities market are subject to market risks, read all the related documents carefully before investing. Please read the SEBI-prescribed Combined Risk Disclosure Document before investing. Brokerage will not exceed SEBI’s prescribed limit.