July 19, 2022
Balanced Advantage Funds or popularly known as BAFs are equity mutual fund schemes with a dynamic asset allocation strategy. These are hybrid mutual funds that invests across equity and fixed income. This category of funds was introduced during fund re-categorisation by Securities and Exchange Board of India (SEBI) in October 2017. These funds usually use their own in-house strategies to decide when the fund will shift from one asset class to another. These funds are extremely flexible and can increase/decrease their equity and fixed income allocations based on market conditions. These funds are multi-dimensional.
Dynamic Allocation
These funds can increase exposure to 80% in equity stocks while the minimum threshold to stock exposure is 30%. The rest is invested in debt securities. The equity and debt levels are adjusted based on market valuations. Adjustments are made basis a pre-defined asset allocation strategy. Balanced Advantage Funds have an arbitrage component, they are able to perform even when the markets are flat.
Deals with Market Volatility
With the ability to reduce the downside in investment valuation in times of decline in markets, returns generated by BAFs are far more stable than a pure equity fund. The fund’s help manage market volatility by buying stocks when they have a low valuation and selling them when stocks are at higher levels.
Stable Growth in Investments
They are actively managed schemes with a diversified portfolio. When returns from key indices are negligible, a dynamic asset allocation strategy tends to outperform the indices by a wide margin giving stable growth in investments.
Diversification
BAFs have a diversified portfolio across Large and Mid Cap stocks. With such blend one gets stability of large cap companies and growth of mid cap companies. Diversification helps in offering risk adjusted returns. Investors fear any market crash, to avoid panic decisions, investors should invest in BAF to avoid unwanted fall.
Who should invest in Balanced advantage funds?
A- Investors seeking to create a diversified portfolio
B- Investors who want to invest in equity for higher return, while limiting their loss in case the markets fall
C- Investors looking for a more aggressive alternative to a pure fixed income portfolio
Tax on gain
If an investor holds investment for more than a year, the capital gains are treated as long-term capital gains. Long term capital gain (LTCG) over Rs 1 lakh on equity component are taxed at the rate of 10%. Short-term capital gains on equity components are taxed at a rate of 15%.
