Balanced advantage funds or dynamic asset allocation funds, are hybrid mutual funds where the asset allocation between the two asset classes - equities and debt - is handled dynamically based on stock market circumstances.
The fund manager adjusts asset allocation based on market value i.e. when valuation is low, it changes to equities and when valuation is high, it shifts back to debt. In this way, dynamic asset allocation seeks to lower downside risk while providing investors with better risk-adjusted returns.
Additionally, the majority of balanced advantage funds in India are subject to equity fund taxation. In equity-oriented funds, long-term capital gains (investments held for more than 12 months) are tax-exempt up to ₹1 lakh every fiscal year, while short-term capital gains (investments held for less than 12 months) are taxed at a rate of 15%. Investors who invest primarily in fixed income securities may benefit from the balanced advantage funds' tax advantages.
Benefits of investing in balanced advantage funds
- Balanced advantage funds are multifaceted. When markets are overpriced, they acquire the characteristics of a hybrid strategy and can reduce equity exposure to as little as 30%.
- In order to benefit from lower valuations and produce significant returns, balanced advantage funds can increase equity exposure to as much as 80% when markets are undervalued. Thus, under such circumstances, it can serve as an equity fund.
- Balanced advantage funds can do well even in flat markets since they have an arbitrage component. They also do away with the requirement for market timing since they employ dynamic allocation.
- These funds sometimes have lower equity holdings at market peaks, which can make them less volatile than aggressive hybrid funds. Moreover, because they are less volatile than aggressive hybrid funds and equity funds, they may be a good choice for novice investors who have never dealt with market volatility.
Risks associated with balance advantage funds
- Despite the fact that SEBI does not specify upper or lower asset allocation limitations for balanced advantage funds, these funds will always have some equity exposure and the scheme's equity exposure will be vulnerable to market risks.
- Credit risks which refers to the risk of the issuer failing to make interest and/or principal payments is applicable to the balanced advantage's fixed income component.
- The potential revenue from employing derivatives can help to mitigate some of the market risk that balanced benefit funds face because of their unhedged equity exposure. The return on investment (ROI) from arbitrage or covered calls, however, is based on the state of the market.
To weather the current market volatility, mutual fund managers and consultants have been urging conservative stock investors to invest in balanced advantage funds. They feel that these plans are the best way for novice and cautious investors to enter the market without having to worry too much about market levels and prices.