Best Balanced Advantage Funds: What are the Benefits of Investing in Them?

Best Balanced Advantage Funds: An Overview

Equity markets are inherently volatile, with ups and downs as part of a lengthy cycle. This is one of the reasons why balanced advantage funds (BAFs) have gained popularity in the last year or two. BAFs, or dynamic asset allocation funds, received significant inflows of about Rs 3,793 crore in December 2021. This ranked second among all the other equity-oriented as well as hybrid funds. 

BAFs' assets under management (AUM) increased the greatest among all equity and hybrid funds in 2021, totaling Rs 71,587 crore. Balanced Advantage Fund is a dynamic asset allocation fund that invests in equities and debt based on market circumstances to balance risk and return. In this article, we shall cover everything related to these balanced funds, ranging from their meaning to such available funds in India. If you are someone who has been looking for a new investment opportunity or bringing about a balance in your overtly oriented fund management, this shall be the best bet for you.

What are balanced advantage funds?

Balanced advantage funds are hybrid funds that invest in both stocks and bonds. Unlike traditional hybrid funds, which hold equity and debt allocations within specific and defined limits, Balanced funds have no such constraints and modify their allocations more flexibly. These are also termed as Dynamic Asset Allocation Funds, particularly because these funds can adapt to the dynamic capital market, easily. In these funds, when equity values are high, the fund manager may adjust the investment strategy more towards debt; when stock prices are low, the allocation may shift more towards stocks.

In general, the fund manager uses a process-driven method, often known as an asset allocation model, to adjust the portfolio between equities and debt based on market circumstances. This is why, when share prices are very high, investors do not perceive a significant drop in their invested capital because the majority of their stake would be in debt instruments. Similarly, investors might benefit the most when the markets rebound since the portfolio manager would have invested more in stocks when the prices were low.

Advantages of Investing In Balanced Advantage Funds

1. The Potential of Steady Gains: The balanced advantage fund invests dynamically in debt and equity. As a result, investors benefit from a debt shield to combat the volatility of equity markets. As a result, returns from balanced advantage funds could be more steady than returns from equity-oriented funds.
    
2. Allocation Is Dynamic: A Balanced Advantage Fund lacks the restrictions of a pure balanced fund.  With the ability to allocate up to 80% of their assets to equity and 30% to debt, BAFs can substantially reduce or increase their allocation to debt and equity depending on market conditions. This enables the BAF category to provide a stronger long-term mix of returns, beating not just inflation but also yielding a far higher return than a normal debt or balanced fund.
3. Tax Leverage: Depending on their asset allocation, the funds might be taxed as debt or equity funds. Most funds, however, maintain equity exposure to stock derivatives in order to leverage the equity tax treatment. They also employ hedging techniques or arbitrage possibilities to reduce risk when equities are overpriced, allowing them to keep their equity allocation.
    
4. Lower risk: One of the major benefits of balanced funds would be that they lower your potential losses by balancing your exposure to debt and equity. When you invest in a balanced fund, you may maximize the exposure to equities and debt, so that when the equity market becomes dangerous, you can choose to lower your exposure by taking some gains and investing in debt instruments.
    
5. Ideal for Beginners: Balanced funds can be excellent investment vehicles for first-time investors who lack expertise in the equity market and are often risk-conservative. One also need not worry about asset allocation because these funds are managed by professionals.

Disadvantages of Investing In Balanced Advantage Funds

1. Lower returns than Equity-oriented funds: While balanced advantage funds might be a safer way to participate in the stock market, the safety comes at a cost. Most balanced funds underperform equity mutual funds, especially during bull markets, because a portion of their investment is still dedicated to debt funds.
    
2. Higher Fee: Because the team of fund managers and research analysts engaged in these funds has to conduct the challenging work of evaluating both equities and debt markets in order to optimize returns, the fund fee paid by balance funds is comparably higher than other funds.
    
3. No Direct Control: Balanced funds are managed by skilled fund managers and therefore investors do not have direct control in such funds. Investors have no full control over which assets are purchased or sold. Balanced funds, like other unit trust funds, are intended for investors seeking a passive way to manage their investments.

Best Balanced Advantage Mutual Funds to Invest in 2022

The following table represents some of the best identified balanced advantage mutual funds as currently trending in India as of 2022. Please note that the following figures are subject to changes as depending on the market volatility and updates. 

Who Should Invest In Balanced Advantage Funds?

• Only if you have a time horizon of at least three years should you consider investing in balanced advantage funds. When opposed to pure equity funds, it balances holdings between equity and debt securities based on market circumstances to produce respectable returns with moderate volatility.
• If an investor wants to diversify their investments against the stock market's pandemic-induced volatility, they may invest in balanced advantage funds. The fund management utilizes model-based triggers to alter allocations based on market circumstances, with no upper or lower limit on equity and debt exposure.
   
• If one wants to avoid timing the stock market, they can invest in balanced advantage funds. This is because, when the stock markets fall, balanced advantage funds expand their exposure to equities instruments because they generate large investment returns when the markets rebound owing to the post-crisis economic recovery.

If you are considering investing in balanced advantage funds you may also opt for a systematic investment plan, or SIP. It is provided by the fund houses that allows you to invest modest sums of money on a regular basis in a mutual fund plan. You gain from rupee cost averaging, which allows you to average out the expense of your investment over time. Also, If you want a larger return than fixed income, you can invest in balanced benefit funds. For example, reduced interest rates in the economy may make it difficult to earn an inflation-beating return on bank fixed deposits. However, it is wise to always adhere to your financial goals before investing in any fund in the market.