Should You Invest in Balanced Advantage Funds? Get Your Answer Here

Are you looking for a dynamically managed investment? Do you want an investment in both equity and debt securities? You may consider putting your money in balanced advantage funds. It is a mutual fund that dynamically shifts between equity, derivatives and debt instruments based on market conditions. AMFI data shows net inflows of Rs 2,711 crore in balanced advantage funds in March 2021 compared to Rs 2,005 crore in February. You could diversify your portfolio with balanced advantage funds if you are a first-time investor in the stock market. Should you invest in balanced advantage funds?

What are balanced advantage funds?

You have balanced advantage funds, also called dynamic asset allocation funds, as a category of mutual funds introduced by SEBI, the capital market regulator, in October 2017. It is a dynamically managed investment that puts your money in a mix of stocks and fixed income instruments.  

You have the fund manager changing the asset allocation depending on market conditions to generate an optimum return with minimum risk for the investors. 

For instance, the fund manager of the balanced advantage fund will reduce exposure to equities when stock markets peak and shift funds into debt securities. You would find the profits remaining intact, even if the stock markets correct or crash in a short time.

Should you invest in balanced advantage funds?

You may consider investing in balanced advantage funds only if you have a time horizon of at least three years. It balances holdings between equity and debt securities depending on market conditions to earn reasonable returns with low volatility as compared to pure equity funds. You can invest in balanced advantage funds if this is your first time in the stock market. 

You must invest in balanced advantage funds if you want to diversify your portfolio against the pandemic-induced volatility of the stock market. The fund manager uses model-based triggers to adjust allocations depending on market conditions, without an upper or lower cap on the exposure to equity and debt instruments. It helps you earn risk-adjusted returns and attain long term financial goals. 

You can invest in balanced advantage funds if you want to avoid timing the stock market. For instance, balanced advantage funds increased exposure to equity instruments when the stock markets crashed in March 2020 due to the coronavirus lockdown. However, it earned high returns on the investment when the markets bounced back due to the economic recovery post-lockdown. You find automatic asset allocation protecting you from the volatility of the stock market. 

You may consider investing in balanced advantage funds through the systematic investment plan or the SIP. It is a facility offered by AMCs that helps you invest small amounts of money regularly in a mutual fund scheme. You get the rupee cost averaging benefit, which helps you average out the investment cost over time.

You can invest in balanced advantage funds if you seek a higher return than fixed income instruments. For instance, lower interest rates in the economy mean you could struggle to get an inflation-beating return from bank fixed deposits. 

It would help if you invested in balanced advantage funds as the equity allocation may ensure an inflation-beating return over some time. However, you must invest in balanced advantage funds only if it matches your investment objectives and risk tolerance. 

Taxation of balanced advantage funds

You have balanced advantage funds taxed similarly as equity-oriented funds. It invests in equity, debt and arbitrage in one portfolio. The arbitrage portion of the portfolio works on the mispricing between equity shares in the spot and futures market. 

You will find the arbitrage component taking advantage of the price differentials between current and future securities to generate higher returns in a rising, falling and flat stock market.

You have balanced advantage funds with at least 65% of the corpus in equity and equity-related instruments taxed as equity-oriented funds. It means long term capital gains, LTCG above Rs 1 lakh per financial year, are taxed at 10% without the indexation benefit. However, if the equity allocation goes below 65% in balanced advantage funds, the remaining allocation in derivative securities helps it qualify for the tax benefits of equity-oriented funds. 

How to pick suitable balanced advantage funds?

• You must select an AMC with significant assets under management (AUM) to manage the sudden redemption pressure of significant investors. Moreover, you must check the mutual fund house’s track record and the fund manager’s investment style before investing your money.
• You must check the strategy of the fund manager of the balanced advantage fund. For example, the fund manager may follow the momentum market indicators or the price to earnings-based approach to decide on the asset allocation.
• You may opt for the balanced advantage fund that has outperformed the benchmark index over some time. Moreover, you must opt for a fund with a lower expense ratio to increase your take-home return.

Are balanced advantage funds better than balanced funds?

You have balanced advantage funds as a multi-dimensional investment when compared to balanced funds. For instance, balanced advantage funds may reduce equity allocation to around 30% when stock markets peak. Balanced funds have a narrow allocation band and don’t offer sufficient protection to your portfolio during overvalued stock markets.

You may find balanced advantage funds as a better investment option than balanced funds for undervalued stock markets. For example, it can increase equity exposure to around 80% when stock markets correct and generate significant returns over some time. However, a balanced fund cannot match the equity exposure of a balanced advantage fund during undervalued stock markets. 

You have balanced advantage funds performing even when stock markets are flat. It has an arbitrage component that takes advantage of the price difference in equity shares between the spot and the futures market. However, balanced funds cannot match this performance as they invest mainly in equity and debt securities. 

You may invest in balanced advantage funds if you seek a higher return than a bank fixed deposit. It is a tax-efficient investment for those in the highest income tax brackets. It is suitable for first-time investors in stocks and can be a part of your core portfolio. In a nutshell, you must invest in balanced advantage funds if you seek reasonable returns to achieve long-term financial goals. 

For any clarifications/feedback on the topic, please contact the writer at cleyon.dsouza@cleartax.in