Balanced Advantage Funds are an effective means for wealth creation as they steer market conditions in favour of the fund and volatility as a growth tool. In a nutshell, Balanced Advantage Funds are a kind of hybrid mutual funds that invest in equities as well as debt, with no restrictions on the total asset allocation in each category. This means that there is no minimum or maximum limit on how much of the portfolio can be invested in a certain asset class or category.

These funds also offer the fund manager the flexibility to change the asset allocation as per changing market conditions to balance the portfolio and offer the best returns to you as an investor. These funds also offer a mix of growth and fixed-income instruments and can dynamically switch between different asset classes.

How do Balanced Advantage Funds work?

The basic assumption made with an investment in Balanced Advantage Funds is that these will help contain the downside of a bear market even as it allows you to participate in the upsides of a bull run. So, when capital markets are doing well, the portfolio can be tweaked to include more equity exposure and when the markets are volatile, or when equities are seeing a decline, the funds can be parked into fixed-income instruments which are considered to be safer investments. This is why they are also called ‘all season funds’.

Balanced Advantage Funds are also called dynamic asset allocation funds as they can allocate and reallocate the funds dynamically – they can gain from the returns being offered by equities when markets are doing well and offer the security of fixed income to bring down risk. While regular hybrid funds keep the allocation between debt and equity static, or within pre-prescribed limits, Balanced Advantage Funds have no such limits and can move their allocations as and when required.

Why should you invest in Balanced Advantage Funds?

In times when markets are volatile, Balanced Advantage Funds can actually exhibit greater stability as compared to other more aggressive hybrid funds by lowering the allocation to equities. So, while you can enjoy the upside from the gains, you can lower the risk of a downside and optimise returns by dynamically adjusting the allocation to equities based on market valuations.

This dynamic asset allocation helps give risk-adjusted returns when you stay invested in the fund over the long term. Every investor must look at their overall financial goals, risk appetite, and investment horizon before making an investment. Balanced Advantage Funds can be suitable even for those investors who have a low threshold for risk and are looking for the right balance between growth and stability.

What factors should be considered before investing?

First and foremost, one must look at the asset allocation model being adopted by the fund manager or AMC. Some fund managers would go with an acyclical approach wherein the exposure to equities is increased during falling markets and reduced when the markets go up. At such times, the funds are diverted towards debt. But, some other fund managers could go for a cyclical asset allocation that goes with the flow of equity markets. This means that the fund manager raises the exposure to equities when the markets are favourable and reduces it when markets fall. Some Balanced Advantage Funds may also look at a combination of both of these approaches to maximise returns and limit the downside risk.

In addition to these, you must look at the past performance of the fund, the experience of the fund manager managing it, and whether the strategies being adopted to generate returns are in synchrony with your risk appetite and overall investment horizon. Most investors end up selecting funds based on short-term performance. Avoid making an investment only based on returns. A good Balanced Investment Fund should be able to protect your downside risks in volatile markets.

How are Balanced Advantage Funds taxed?

One of the other major advantages that these funds offer is that they can be structured in such a manner that they are taxed as equity funds. To elaborate, when the funds lower their exposure towards equities in times of volatility, it is done in such a manner that the equity plus arbitrage exposure to the fund is more than 65 per cent of the total corpus.

This makes it eligible for taxation as per equity rules wherein investors need to pay 10 per cent long-term capital gains tax if they stay invested in the fund for a period of more than one year. So, in effect, while the risk of equities is taken away, the taxation is as per equities, not debt.

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Mutual Fund investments are subject to market risks, read all scheme related documents carefully.