How does balanced advantage fund works?
How do balanced advantage funds work? Balanced advantage fund is a hybrid fund, which changes its asset allocation i.e. equity and fixed income allocations, dynamically according to market conditions. Balanced advantage funds usually reduce equity and increase fixed income allocations when equity valuations are high.
Benefits Of Balanced Advantage Funds
In addition, these funds can significantly cut or raise their allocation to debt and equity depending on the market conditions. Hence, these funds can give a better inflation-adjusted long-term return, more than a typical debt or balanced fund.
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.
Before investing in a Balanced Advantage fund, assess your risk profile, investment objective and investment horizon to select a suitable scheme in the category. Then analyse the fund's consistency in performance across various market periods (bull and bear market phases) compared to the benchmark and category peers.
The balanced advantage fund or dynamic asset allocation category has offered an average return of 3.52% in 2022.
Disadvantages of investing in balanced funds
A sizeable portion of a balanced fund is invested in bonds. As such, they are unlikely to outperform a pure equities fund over a long investment horizon (e.g. 20 or 25 years). If you're looking for a more active product, then balanced funds are not for you.
Are Balanced Advantage Funds replacement for debt? As these funds invest in equities, they are not a replacement for debt in your portfolio. While they fall less when markets correct, they can give negative returns.
Mohanty asserts, “BAFs can be useful for conservative investors who wish to step up the risk ladder. The growth assets will prop up portfolio return, without taking undue risk.” At the same time, investors with a high equity exposure may invest in BAFs to reduce the portfolio volatility.
These funds can keep you on track in a topsy-turvy 2022.
Older investors on the verge of retirement may opt for a more balanced approach. Often, this consists of a healthy weighting toward lower-risk bonds and cash.
- BOI AXA Mid and Small Cap Equity and Debt Fund.
- ICICI Prudential Multi-Asset Fund.
- HDFC Balanced Advantage Fund.
- UTI Hybrid Equity Fund.
- Sundaram Equity Hybrid Fund.
- Kotak Equity Hybrid Fund.
Which is better FD or Balanced Advantage fund?
As compared to an FD, balanced funds may deliver higher returns over a medium-term investment horizon of say five years. Additionally, you would get the benefit of indexation on long-term capital gains on the debt components.
In retirement a balanced fund allows you to take systematic withdrawals while maintaining an appropriate asset allocation easily. This approach may work well for those who have one account to draw from, such as $100,000 in an IRA where they want to take out $400 a month.
The consensus is that a well-balanced portfolio with approximately 20 to 30 stocks diversifies away the maximum amount of unsystematic risk.
Balanced funds are taxed like debt funds as their equity allocation even at a maximum of 60% lies below 65% that qualify for equity-oriented funds and get the tax treatment alike. On the other hand, balanced advantage funds are taxed like equity or debt depending on the asset allocation at the time of redemption.
| Mutual fund | 5 Yr. Returns | 3 Yr. Returns |
|---|---|---|
| Edelweiss Balanced Advantage Fund - Direct Plan - Growth | 11.72% | 15.32% |
| Mirae Asset Hybrid - Equity Fund - Direct Plan - Growth | 12.39% | 14.3% |
| SBI Equity Hybrid Fund - Direct Plan - Growth | 12.41% | 14.2% |
| UTI MUTUAL FUND - Direct Plan - Growth | 9.32% | 13.98% |