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Are balanced advantage mutual funds really that safe to invest in

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You may have heard that SEBI implemented a new methodology of categorizing mutual funds [MFs].  However, there are still some pockets of confusion even after the new norms have come into place and ushered in an era of uniformity. A large deal of confusion still prevails between a balanced fund and a balanced advantage fund. It is important for investors to know how to clearly demarcate between these funds and understand the risk aspects surrounding them.

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Differences between balanced funds and balanced advantage funds

After SEBI-mandated re-categorization took place, there have been changes in both fund categories and also some changes within the categories. Here are the main differences between balanced and balanced advantage funds:

Balanced Funds – A balanced fund, also called hybrid fund, invests in both equities and debt. Under SEBI’s new norms, aggressive/equity-oriented hybrid funds invest 65~80% of their portfolio in equities. As per tax laws, funds that maintain 65% or above in equity investments are classed as equity funds and are eligible for Capital Gains tax benefits. However, there are also hybrid funds that invest a greater portion of their portfolio in debt [less than 65%]. These debt-oriented hybrid funds are treated as debt funds as per tax laws and don’t enjoy the capital gains tax advantages available for investments in equity funds.

Both kinds of balanced funds – equity-oriented and debt-oriented hybrid funds maintain their asset allocation irrespective of where the stock markets move. For instance, if equity markets move downwards thereby providing investment opportunities, a balanced fund will not change its asset allocation to take advantage of this opportunity and will retain its asset allocation at a near-static level.

Balanced Advantage Funds A Balanced Advantage Fund [BAF] also known as a dynamic asset allocation fund invests in both equity and debt and the allocation between the two is managed dynamically. The term ‘dynamically’ allows mutual fund houses to have flexibility in maintaining levels of debt and equity within these funds.

Balanced Advantage Funds and their advantage

BAFs are known to adjust their equity exposure to prevailing market valuations i.e. whether valuations are cheap or expensive. So, when stock market valuations are high, BAFs will lower their equity exposure and when they are low, they will increase equity exposure. These schemes work best for investors who have a good grasp over asset allocation strategies. Investors, who understand the wealth generation capability of equity investment may also benefit from investing in BAFs. Here is why you should consider BAFs

  • Good in volatile conditions Equity markets are going through increased periods of volatility in the present scenario. Since BAFs have the flexibility of changing equity exposure to take advantage of market conditions, they can offer more protection against volatility.
  • Good for capital growthIn undervalued markets or where fundamentally strong companies’ stocks have been browbeaten, BAFs can increase exposure to equities to as high as 80% and have the ability to generate considerable growth.
  • Eliminate need to time marketsThere is no need to time the markets if you invest in a BAF. These funds have the expertise to take advantage of market movements.

Given the broad macroeconomic factors and the resultant volatility in the markets, Balanced Advantage Funds [BAFs] have advantages that investors should definitely consider.