It’s a new day and we are going to learn about a new mutual fund today. There are several types of mutual funds available in the market.
It might feel like a task to choose the one that suits our financial needs. That’s why we encourage everyone to learn the basics of different mutual funds so that they can invest in the mutual funds that are suitable for their risk tolerance and investment goals. In this article, we will be talking about Balanced Advantage Funds and their benefits.
What Is A Balanced Advantage Fund?
Also known as Dynamic Asset Allocation Funds, Balanced Advantage Funds are a category of hybrid mutual fund schemes.
These funds invest in a mix of stocks and fixed deposit-like instruments. They are a category of hybrid mutual funds wherein asset allocation between equity and debt is managed or rearranged as per the prevailing market conditions.
Like every other mutual fund, balanced advantage funds too invest some portion of their money in debt and some in equities. However, they automatically switch their allocation from equity to debt when equity prices become too high. These funds also have the advantage of entering and exiting from equities at a better time.
How Do Balanced Advantage Funds Work?
The objective of balanced advantage funds is to take advantage of higher returns that are provided by equities while maintaining the balance on risk by investing in debt. These funds do not have any pre-set limits for investing in debt or equities.
The fund makes investments in equities at a time when they are available at a comparatively cheaper price. They also buy equities at a high price and sell at an even higher price. When equities are not available at cheaper prices, they stick to investing in debt. In order to figure out the shift between equity and debt, fund managers use the Asset Allocation Model.
What are asset allocation models? They are in-house mathematical models that asset management companies (AMCs) use to find out the perfect combination of equity and debt allocations while considering the current market conditions. Usually, these models are created based on a fund manager’s hypothesis about profit projections, historical data, and other factors that can help in offering higher returns to investors over a long-term period.
Who Should Invest In Balanced Advantage Funds?
Balanced advantage funds are suitable for investors who wish to invest in mutual funds, which offer higher returns on equities, but do not want to take too many risks that come with direct investments in equities. These funds offer higher returns than debt or a hybrid fund. However, the risk profile of these funds is slightly higher than those funds.
The most important point to note here is that balanced advantage funds are not as risky as pure equities or pure equities funds. The risks get reduced if you stay invested for the medium or long term. So, if you are looking to invest in these funds, you need to stay invested for a minimum of three years to benefit from them.
What Are The Advantages Of Balanced Advantage Funds?
There are several benefits to investing in balanced advantage funds and here are a few of them.
1. Stable Returns
Unlike equity mutual funds, a balanced advantage fund can allocate up to 80% of its assets to equity and up to 30% to debt. On top of that, these funds can considerably reduce or raise their allocation to equity and debt depending on the market conditions. Hence, these funds can offer a better inflation-adjusted long-term return, which is more than a typical debt or balanced fund.
2. Low Risk
Since balanced advantage funds invest in both equity and debt depending on the market conditions, the overall risk of the portfolio is reduced. If you have a moderate risk tolerance, balanced advantage mutual funds would be a great addition to your portfolio. Apart from protecting your investments from capital erosion, they can help you in wealth creation as well.
3. Dynamic Asset Allocation Strategy
Fund managers of balanced advantage funds follow the dynamic asset allocation strategy. According to this strategy, during the bull phase, the fund manager may transfer a certain portion of the investment from the debt market to equities. Meanwhile, during economic downturns, the fund manager may transfer some investments from equity to debt instruments. This will help investors minimize the risk and earn higher returns.
4. Less Monitoring
Keeping up with the performance of your investments takes a lot of time and effort. When the market is rising, you would have to invest your money in equities and vice versa. However, when you invest in balanced advantage funds, you can diversify your portfolio among various bonds and equity securities. You do not have to actively change your asset allocation as your fund manager is doing it for you.
What Is The Taxation Of Balanced Advantage Funds?
If the annual average allocation to listed domestic equity shares is a minimum of 65% of the total assets under management (AUM), the fund will be taxed as an equity-oriented scheme. As per the asset allocation specified, the fund can invest 0-100% in equity and debt respectively.
If you sell your holdings in the fund in less than 12 months, short-term capital gains (STCG) tax of 15% (plus surcharge, if applicable, and cess) will be applicable. If you sell your holdings after 12 months, long-term capital gains (LTCG) tax of 10% (plus surcharge, if applicable, and cess) without indexation is applicable.
Income distribution cum capital withdrawal (IDCW) will be taxable in the hands of investors and the mutual fund will deduct TDS (tax deducted at source) at 10% for resident investors and 20% (plus applicable surcharge and cess)for non-resident investors before payouts/reinvestment. The good news is investors can claim a tax credit of TDS deducted at the time of filing their annual return.
In The End…
Balanced advantage funds are a perfect investment choice for investors who are looking to earn stable returns and want to take moderate risks. You can rest easy knowing that your funds are making money even during market downturns. If you are looking for the perfect place to start investing in balanced advantage funds, create a free account with Koshex in less than 60 seconds and begin your journey today!
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