Both Balanced mutual funds in India and Balanced Advantage Funds are categorised under Hybrid MF schemes. The difference lies in the investment strategy. Curious? Let’s understand what balanced funds and balanced advantage funds are and how they differ in detail.
What are balanced funds?
Balanced funds are hybrid funds that allocate the fund corpus to both equity and debt asset types in a balanced ratio. When you invest in balanced mutual funds online, the investment follows a pre-decided ratio of investing. For instance, an aggressive balanced fund can keep 65-80% of their investments in equity securities and the rest in debt.
Here, the balanced exposure to bond and stock instruments helps with income generation and capital appreciation. When looking for the best-balanced fund for SIP, you can gauge your risk appetite to invest in equity-oriented (aggressive) or debt-oriented (conservative) funds.
Additional Read: What are Balanced Funds?
What are balanced advantage funds?
The balanced advantage funds, also known as dynamic asset allocation (DAA), are hybrid MFs, which dynamically manage their exposure to equity and debt instruments. This category was built according to the Securities and Exchange Board of India (SEBI) new norms and is free of minimum exposure caps.
Here, the assets you park in stocks and equities generate market-linked returns. On the other hand, the assets you invest in several debt instruments offer fixed returns. Based on prevailing market valuations, the top-rated balanced advantage funds shift their allocation to equity and debt instruments. Hence, when markets rise, your funds shift to debt instruments. Similarly, if the markets dip, the collected gains stay intact.
The dynamic nature of the funds primarily depends on the in-house model and strategy, which decide to move funds from one instrument to another. With dynamic asset allocation, the MF schemes eliminate any scope of human biases during investment decision making. Last but not least on the list of balanced advantage fund features is that these MF schemes put market exposure to equity derivatives to get equity tax treatment and turn to hedging when the stocks are overvalued.
Additional Read: 4 Ws of Balanced Advantage Funds
Difference between balanced and balanced advantage funds
Balanced funds park your money in equity and debt in a balanced ratio. In parallel, balanced advantage funds shift the corpus between equity and debt securities as per the continually changing market circumstances.
Balanced advantage funds are multi-dimensional. Hence, if the markets are overvalued, they inherit the structure of a conservative scheme, decreasing their equity exposure to as low as 30-35%. In a similar situation, a balanced fund can’t offer as much protection due to its narrow allocation strategy.
Whether you invest in a SIP or lumpsum, a balanced advantage fund can offer you similar returns as a traditional balanced fund in fair value market conditions by maintaining the balance between equity and debt exposure. Here, a balanced fund will only help you generate solid returns in fair value markets.
Over to you
While both funds have the potential to offer high returns, however, balanced advantage schemes provide better risk-adjusted returns. Thanks to their flexibility, these funds leverage market volatility to move money into bonds when markets get expensive. But balanced funds can’t lower their equity investments after a limit. So, be it capital appreciation or income generation, these funds are well-suited investment avenues for you. When looking to invest through a multi-purpose investment solution, download the Moneyfy app today.