Balanced Advantage Funds; A Mutual Fund Category to Time the Markets

Out of different mutual fund categories, hybrid funds have a unique approach to equity markets. While few hybrid funds have limited ability to balance the Debt and equity portion, few types of funds have unlimited flexibility to change the asset allocation. They are Balanced Advantage Funds (BAF).

Balanced Advantage Funds or BAFs are open-ended hybrid schemes that invest in equity and debt securities. A Balanced Advantage Fund can dynamically invest in equity and Debt from 0% to 100% based on the market valuations.

When the market valuations are high, a fund manager of BAF can reduce the exposure of equities up to the extent of 0%. Similarly, when the valuations are low, a fund manager of BAF can increase the exposure of equities up to 100%. Because of this dynamic nature to change the allocation across asset classes, BAFs are also called Dynamic Asset Allocation Funds.

 

Differences between Aggressive, Conservative and Balanced Advantage Funds.

Aggressive Hybrid Funds:

An Aggressive Hybrid Fund should invest at least 65% to 80% of its assets in Equities and a minimum of 20% to 35% in Debt. Due to their higher weightage to equities, these funds are called Aggressive Hybrid Funds.

Conservative Hybrid Funds:

A Conservative Hybrid Fund should invest at least 75% to 90% of its assets in Debt and a minimum of 10% to 25% in Equities; due to its higher weightage to Debt, these funds are called Conservative Hybrid Funds.

Balanced Advantage Funds:

A Balanced Advantage Fund does not have any minimum allocation requirements to a particular asset class and can dynamically invest between Debt and Equity as per the market valuations and future outlook.

 

Key features of BAFs are as follows:

Process Driven Approach:

Each Balanced Advantage Fund or BAFs has an in-built process to buy stocks at low valuations and exit at higher valuations. This built-in strategy to buy low and sell high eliminates the human bias or dilemma in booking profits and adding exposure.

Reduced Downside Risk:

BAFs are allowed to have arbitrage exposure; due to this, during the turbulent periods of the markets, a fund manager of BAF can hedge their positions. As the assets of BAF are invested based on valuation and future outlook, the downside risk of the markets is reduced to a larger extent.

High Flexibility:

Due to the BAF’s nature of dynamic asset allocation, the fund manager of BAF has higher flexibility to change the asset allocation.

Taxation:

Most Asset Management companies aim to have at least 65% exposure to equities in BAFs. Thus, Balanced Advantage Funds have taxation similar to equity mutual funds with LTCG of 10% and STCG of 15%

 

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