Introduction
Choosing a mutual fund scheme forms an important decision in an investment journey. When so many mutual fund schemes are lined up, it becomes confusing for new investors to choose the right scheme. From all these alternatives, one dilemma arises when choosing between two, which is often between balanced and advantageous funds. Let's proceed to know about these funds in detail.
Understanding the three different mutual fund scheme types is crucial before talking about balanced funds and balanced advantage funds.
- Equity Funds: These funds make investments in company equity shares.
- Debt funds: These invest in government securities, bonds, and other fixed-income products.
- Hybrid funds: Investments across several asset classes, including debt and equity.
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What are Balanced Funds?
Balanced funds are hybrid mutual funds that invest in debt and equity in a balanced ratio. Typically, these funds follow a 60%-40% allocation, where 60% is invested in one asset class (usually equity) and 40% in the other (usually debt). There can be a change in the allocation, but only by 20%. For example, the segment with 60% of the funds can be brought down to a minimum of 40%, and the 40% segment can be allocated a maximum of 60%.
What are Balanced Advantage Funds?
Like balanced funds, balanced advantage funds (BAFs) are hybrid mutual funds that allocate funds to equity and debt. However, a key feature of these funds is the lack of restriction on asset allocation. BAFs are dynamic and allocate funds depending on market movements. For instance, when markets peak, the funds might reduce equity allocation and move them to debt to preserve capital while generating income even in downturns. Since there are no restrictions on capital allocation, BAFs may allocate up to 100% of funds to one asset class, though this is uncommon.
Balancing Advantage Funds V/s Balanced Funds: A Comparison
To understand better the differences between balanced funds and balanced advantage funds, let's explore the key points of difference between the two:
Fund Allocation
- Balanced Funds: Invest in a fixed 60%-40% ratio. In the case of rebalancing, the allocation can change only by 20%.
- Balanced Advantage Funds: No fixed ratio, allowing for more dynamic and flexible allocation based on market conditions.
Risks
- Balanced Funds: Risk is tied to the fixed allocation ratio, which may not adapt well to market changes.
- Balanced Advantage Funds: Better at handling risk due to their ability to rebalance portfolios in line with market performance. These funds can lower equity exposure when the market underperforms, something balanced funds cannot do.
Returns
- Balanced Funds: Steady returns are possible but limited by the fixed allocation.
- Balanced Advantage Funds: These have the potential for higher returns due to their dynamic allocation, which allows them to adapt to favourable market conditions.
Objectives
- Balanced Funds: Aim to provide long-term growth and stability.
- Balanced Advantage Funds: They minimise the impact of market volatility and try to deliver a risk-adjusted return.
Tax implications
- Balanced Funds: Treated as debt funds if equity allocation is below 65%.
- Balanced Advantage Funds: Can be taxed as equity or debt funds, depending on the allocation. Many BAFs aim to allocate 65% of funds to equities to receive the same tax benefits as equity funds.
Difference Between Balanced Funds and Balanced Advantage Funds
Here are the key differences between balanced funds and balanced advantage funds based on specific criteria:
Conclusion
Choosing between balanced funds and balanced advantage funds depends on your investment goals and risk tolerance. Balanced funds are a steady approach with a fixed allocation, possibly offering long-term growth and stability. Balanced advantage funds, on the other hand, may provide greater flexibility and even higher returns by dynamically adjusting to market conditions and helping to mitigate risks.
Understanding these differences lets you decide whether balanced or advantage funds suit your investment needs.
Consult your financial advisor to understand the scheme better and choose wisely.
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