The market is moving sideways, which will remind you of the song “Idhar Chala Main Udhar Chala” launched in 2003. Jokes apart, this crab-like movement in both directions has made many investors jittery and frustrated. Many have started parking their money in myriad balanced and balanced advantage funds to escape the volatility and benefit from any kind of market movement.
While this sudden shift in investment priorities is understood, investors’ lack of understanding regarding these funds is appalling. To start with, many investors misconstrue balanced funds and balanced advantage funds as the same. Not many know that their funds’ similarity is limited to the fact that they both fall under hybrid funds.
How do balanced and balanced advantage funds differ?
These funds differ on myriad grounds including allocation, expense ratios and taxation. Both are different kinds of hybrid mutual funds that allow you to invest in multiple asset classes depending on the scheme. Investing in hybrid funds allows you adequate exposure to equities, debt and other asset classes including fixed-income plans. The idea behind parking money in a mix of many asset classes is to diversify the portfolio. Instead of buying stocks of varying risks and earning potential, you may invest in these funds that will help you earn while mitigating the inherent risks involved.
We talk about the need to diversify our investment portfolio. But, does diversification through hybrid fund investments really help?
Viral Bhatt, Founder, Money Mantra says, “I will definitely suggest hybrid funds for both short-term and long-term financial goals. The mix of equity and debt yields returns along with a sense of stability irrespective of market movement. If you are worried about market volatility and the recurring market downside movements, I will suggest these hybrids to protect your investments against the continued downsides. There are different types of hybrid funds, viz. conservative hybrid funds, aggressive hybrid funds, multi-asset funds, dynamic asset allocation funds, and more. This allows you to diversify within the hybrid category and invest without worrying about the volatility in the equity markets.”
Both balanced and balanced advantage funds invest in an array of equity and debt securities. However, they invest in the extent to which they invest in each of them, expense ratios and taxation benefits.
Asset allocation difference
To start with, in balanced funds, you will see an almost equitable distribution to both asset classes. The minimum allocation to each asset class is 40 per cent, which means that these funds can either invest 50-50 in both kinds of assets or 40 per cent in one and 60 per cent in the other.
However, balanced advantage funds are bound by no such guidelines regarding asset allocation, thereby, allowing the fund managers the much-needed flexibility to switch between these assets depending on the market conditions.
The pre-defined asset allocation explains the stability of the returns in balanced funds compared to their balanced advantage counterparts in the long run.
Taxation and expense ratio difference
Balanced funds are treated like debt funds for taxation purposes, which means they are subject to income tax guidelines just like debt funds. On the other hand, balanced advantage funds can be taxed as both equity or debt depending on the asset allocation at the time of redemption.
The expense ratios of balanced and balanced advantage funds also differ widely, which helps you realize how much the asset management companies are charging to invest in the market on your behalf. Below is the chart comparing the expense ratios of some of the top balanced advantage funds with balanced funds.
| Balanced Funds | Expense Ratio | Balanced Advantage Funds | Expense Ratio |
| ICICI Prudential Equity & Debt Fund | 1.80% | Bank of India Balanced Advantage Growth | 1.82% |
| HDFC Retirement Savings Fund - Hybrid Equity Plan | 1.12% | HDFC Balance Advantage Growth | 0.99% |
| Kotak Equity Hybrid Fund | 0.64% | ICICI Prudential Balanced Advantage Growth | 0.95% |
| Canara Robeco Equity Hybrid Fund | 0.61% | Shriram Balanced Advantage Growth | 0.60% |
| Quant Absolute Fund | 0.56% | Kotak Balanced Advantage Growth | 0.49% |
| Mirae Asset Hybrid Equity Fund | 0.42% | Tata Balanced Advantage Growth | 0.31% |
Before investing in any of these mutual funds, you must be aware of your investment objectives. Apart, be judicious about the investment frequency and tenure depending on your financial goals and risk appetite. Parking money in mutual funds helps only when you are aware of why you are investing and the estimated corpus you would like to have in the near or distant future depending on whether you are in the game for a short term or a prolonged term extending beyond a decade or more.
