The investment objective of balanced advantage schemes is to capitalize on the upside in equity markets while limiting the downside by investing in debt instruments.
If you are picking a mutual fund scheme which belongs to the Balanced Advantage category, then remember that the investment in them is managed dynamically between equity and debt asset classes. Of all the mutual fund categories available to mutual fund investors, the schemes of the Balanced Advantage category hold a unique place. Balanced Advantage is essentially a Hybrid category and is also referred to as Dynamic Asset Allocation category as per the SEBI’s classification of mutual fund schemes.
Of late, Balanced Advantage Funds (BAFs) are becoming the flavour of the season and may soon become a part of your MF portfolio. But, before you invest in a Balanced Advantage fund, it’s better to know how they work and how different they are from other equity and debt funds.
An important distinct feature of BAFs is that it can be a 100 per cent equity fund or it can be a 100 per cent debt fund . This is because as per the SEBI rules, in a dynamic asset allocation fund or balanced advantage fund, the fund manager is allowed to be either 100 percent in equities or 100 percent in debt or have a mix of both the asset classes.
The investment objective of balanced advantage schemes is to capitalize on the potential upside in equity markets while attempting to limit the downside by dynamically managing the portfolio through investment in equity and equity-related instruments and active use of debt, money market instruments, and derivatives. Unlike balanced hybrid funds (40 to 60 percent in equities) or aggressive hybrid funds (65 to 80 percent in equities), they can maneuver between the two asset classes in extreme situations.
In practice, therefore, BAFs will have allocation to both equity and debt in varying proportions. Make sure you check the allocation before investing. Knowing this is also important because if you are looking for BAF with higher equity exposure, you may have to look for another one. Similarly, those looking for higher debt exposure may have to check if the specific BAF is carrying higher debt allocation or not. Making an informed investing decision helps.
However, this may not work at all times. Over time, based on market conditions the fund manager can modify allocation between equity and debt in Balanced Advantage funds. A comparison among BAFs is also a tricky task. If allocation across equity and debt differs amongst them, a comparison in terms of returns may not be the right approach.
Currently, market valuations are at a high and BAFs may be taking limited exposure in equities. The role of fund manager will be key in BAFs and hence opt for these funds by looking at the long term consistent performance of the funds.
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