Balanced Advantage Funds (BAF) follow a hybrid/dynamic asset allocation model between equity and debt with no threshold on asset allocation. Fund managers shift your portfolio between equity and debt based on market conditions. This dynamic asset allocation method offers both growth and stability, especially during market ups and downs.
BAFs are one of the best mutual fund schemes to stabilize returns during market volatility. It’s safe to say that BAFs can balance your investment portfolio and here’s everything you need to know about these schemes:
Depending on market performance, fund managers allocate 65-80% of total assets into equities and 35-20% into debt. The allocation gets periodically rebalanced to minimize the risk and maximize the returns.
Fund houses usually have an in-house allocation model which could be any one of the below.
Counter-Cyclic Allocation Model
This model reduces investments in equity and increases debt allocation when the market is high. When the market is low, the investments tilt more towards equities.
Pro-Cyclic Allocation Model
This model follows the market trend and invests more in equity when the market is growing. Fund managers gradually reduce equity holdings when the market is falling.
Some funds use a combination of both methods depending on market conditions.
As BAFs follow a dynamic asset allocation model, the fund has debt allocation to fight equity market volatility. The portfolio will not crumble dramatically even when the equity market is at its lowest. The debt allocation within the fund balances your portfolio as you explore equity opportunities through BAF thereby generating stable returns.
As BAFs are not completely allocated to equities, the risk factor is relatively lower. The exposure to equity and debt is healthy enough to tolerate market volatility and also generates decent returns.
Fund managers use market conditions to your benefit as they dynamically allocate assets between debt and equity. Whenever equity instruments deliver superior returns, fund managers may shift some of them towards debt instruments to balance the risk.
When calculating tax, BAFs fall under equity funds in India, allowing investors to gain tax benefits. The tax regime is similar to equity funds. Short Term Capital Gains (investments held for <12 months) will be taxed at 20%. Whereas Long Term Capital Gains above 1.25 lakhs (investment held for > 12 months ) will be taxed at 12.5%.
Although BAFs have lower risk, they are not completely risk-free. If the equity allocation is higher, the risk will also be higher due to equity market volatility.
The gain in BAFs won’t necessarily be as good as pure equity funds when the market boosts. However, the returns on BAF would be better than fixed-income funds. To gain higher returns, it’s best to keep your investment horizon for at least 3 years or more.
Again, you should only invest in BAFs if you can keep aside a horizon of 3 years or more. BAF may not be an ideal option for investors looking for short-term investments.
As mentioned above, BAFs are taxed similarly to equity funds. If you redeem your investment before 12 months, it will fall under Short Term Capital Gain (STCG) tax which is flat 15% on capital gains.
And if you redeem your invested money after 12 months, it will fall under Long Term Capital Gain (LTCG) which is 10% on capital gain above INR 1 Lakh. It is recommended to hold these funds for a longer period of time to take advantage of tax benefits and most likely, higher returns.
BAF is suitable for investors who are seeking equity-like returns but with slightly lesser risk. BAF funds are less riskier than equity funds. Consider investing in BAF if you are comfortable with moderately aggressive investment or if your risk profile is balanced. BAF funds tend to deliver superior returns over a long period of time. We would recommend you keep a wider investment horizon, possibly 3-5+ years. If any one of the above factors matches your goals, you should definitely invest in BAFs. Call VNN Wealth Experts for more guidance.
Balanced Advantage Funds, aka Dynamic Asset Allocation Funds, are perfect to be a part of your long-term financial goals. You get the best of both equity and debt funds with low to moderate risk. Even though these funds are dynamic, fund managers will divide asset allocation as 65-80% into equity instruments and 35-20% into debt instruments. 80-20 allocation is more aggressive and risk-prone. 65-35 allocation can deliver decent returns with lower risk.
As you know, the equity market is highly volatile. Even if you have a high-risk appetite, you may want to allocate a certain percentage to this category to bring stability to the portfolio during volatile times. To get equity-like returns with balanced risk via debt instruments, consider investing in BAF. The SIP method may further balance the risk instead of lump-sum.
Read more about the advantages of SIP.
For any further guidance on investment planning and portfolio building, reach out to us anytime.
