Can balanced advantage fund help you withstand market volatility?

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Owing to the volatility in the stock market, many investors seek options that can ride the wave of financial uncertainty. While the mutual fund category has remained a popular avenue of investment for quite some time, investors are specifically opting for hybrid schemes. This is because hybrid funds relatively reduce the risk while offering potentially better risk-adjusted returns. Balanced advantage funds are, therefore, gaining traction.

  • Table of contents
  1. What is a balanced advantage fund?
  2. How do balanced advantage funds work?
  3. Who should invest in a balanced advantage fund?
  4. How are balanced advantage funds taxed?
  5. 4 reasons to invest in balanced advantage funds
  6. FAQ

What is a balanced advantage fund?

A balanced advantage fund is a mutual fund scheme that shifts asset allocation from equity to fixed income (debt) and vice versa based on the prevailing market conditions. The fund manager allocates more assets to debt securities when the market valuation is high and switches to equity when the stock prices is low. This allows investors to avoid facing the brunt of each market movement and derive potential benefits from their investments.

How do balanced advantage funds work?

Asset Management Companies (AMC) use mathematical models to determine the asset allocation for the fund at any given point. These mathematical models use different parameters to determine the asset allocation that can offer reasonable returns based on the market conditions. Fund managers switch to equity or debt securities based on the asset allocation suggested by the model.

At any time during the investment period, the asset allocation of a balanced advantage fund can range anywhere from 20% to 80% in equity and equity-related instruments.

Who should invest in a balanced advantage fund?

You should consider investing in a balanced advantage fund if:

  • You have a moderate to very high risk appetite.
  • You have a longer investment horizon.
  • You want to mitigate impact on our investment against market volatility.
  • You are looking for an investment option that offers income in the form of Income Distribution cum Capital Withdrawal (IDCW) option and potential capital appreciation over long term.
  • You want to create a retirement corpus.
  • You want to diversify your portfolio.

How are balanced advantage funds taxed?

Since the asset allocation is dynamic in balanced advantage funds, you may be wondering how they are taxed. This is where things get interesting. Even though the asset allocation can go lower than 65% in equity, balanced advantage funds are still taxed as equity funds. This is because fund managers maintain the gross equity exposure above 65% by using derivatives even if the market is expensive.

Short-term Capital Gains (STCG) from balanced advantage funds are taxed at 15%. Long-term Capital Gains (LTCG) are exempt from tax up to Rs. 1 lakh and taxed at 10% for gains more than Rs. 1 lakh.

4 reasons to invest in balanced advantage funds

Here are the key reasons why you should add balanced advantage funds to your portfolio:

Lower risk level: When investors choose equity funds, the risk of incurring sizeable losses during market volatility is relatively higher. Balanced advantage funds offer a relatively lower level of risk than pure equity fund because of their investment in debt instruments in addition to equity instruments.

Relatively reasonable returns: If you choose pure debt funds, the risk can be lower but so are the returns potential. Similarly, with equity funds the possibility of getting good returns is high but so is the risk. A balanced advantage fund offers relatively reasonable returns at a lower level of risk than pure equity funds. This is because it buys and sells equity based on market conditions and leverages price differences in the stock market and derivatives market.

Tax efficiency: Equity taxation treatment of balanced advantage funds makes them more desirable than some other types of hybrid funds. It is recommended to hold the investment for the long haul so that you have to pay LTCG tax, which is preferred by most investors.

Diversification of investment portfolio: A balanced advantage fund can be a suitable option to diversify your portfolio and enhance the return potential with commensurate risk. When the market conditions are volatile, a balanced advantage fund investment can be a good fit.

In conclusion, a balanced advantage fund aims to mitigate from volatility by dynamically allocating assets from equity to debt and vice versa based on market movements. You get relatively stable returns because of dynamic asset allocation. You also get the equity taxation treatment, which helps you keep more of the money generated from your investment. All you need to do is speak to your financial advisor to find out how you can take advantage of this opportunity by investing in a balanced advantage fund


Is it good to invest in balanced advantage fund?
Balanced advantage funds offer diversification with a mix of equity and debt instruments. Fund managers utilize dynamic asset allocation and manage risks from investments in equity and fixed income to optimize returns. These funds can offer better growth potential as compared to pure debt funds with some mitigation against market volatility.

What are some of the benefits of investing in a balanced advantage fund?
Asset allocation, relative stability compared to equity, comparatively lower risk than pure equity funds, are some of the major advantages of investing in balanced advantage fund.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.