The Buyt Desk
The Share Markets always proves us wrong. The best shot that you can have is to obey the market trend. Do not predict the market, do not fight the market but prepare a strategy by befriending the trend. The Balanced Advantage Fund(BAF) is that category of mutual fund which works on the strategy of changing itself according to the market trend. BAFs are a type of Hybrid Mutual Funds that gives the flexibility to invest in multiple asset classes like equity, debt, gold, REITS & InvITS. The objective of hybrid funds is to reduce volatility by diversifying the asset and try to generate better risk-adjusted returns.
6 Different Types of Hybrid Funds
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Aggressive Hybrid Funds- Schemes in this category have 65% to 80% allocation in equity and around 20% to 35% allocation in debt.
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Conservative Hybrid Funds- Schemes in this category have a smaller exposure to equity of around 10% to 25% and a larger allocation towards the debt of up to 75% to 90%. A small percentage could be toward REIT, InvITs or even arbitrage funds.
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Balanced Hybrid Funds- The schemes in this category have 40 to 60% of the AUM in Equity and 40% to 60% in debt.
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Multi-Asset Allocation- These funds invest in at least three asset classes with a minimum allocation of at least 10% each in all three asset classes. Various assets in this scheme are equity, debt, gold, Reit or preference shares.
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Equity Saving Funds- The equity exposure in this scheme could be 65% and more. The unhedged equity portion is brought down by derivative positions.
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Dynamic Asset Allocation or Balanced Advantage Funds- This category of funds is different from all the other schemes. Because the regulator has allowed the AMC to dynamically manage the equity and debt portion in the scheme. Every Mutual Fund Company has a strategy or a proprietary model based on various indicators like Price to Earnings, Price to Book, momentum, and moving averages according to which the funds keep shifting equity and debt allocation. The idea is to modify itself as per the market trends.
What makes Balanced Advantage Funds different?
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It automatically divides your investment between equity and debt and re-balances your portfolio. That is why it is also called a dynamic asset allocation fund. The fund house/AMC will follow a strategy as per the market condition and change the orientation of the scheme. If a fund has a counter-cyclical approach it would buy when the markets are at low and sell when markets are at high. On the other hand, a fund with a pro-cyclical approach will do just the opposite. The pro-cyclical fund will buy on highs and sell when the market goes higher.
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When the schemes rebalance within the fund and change their debt and equity exposure there is no taxation imposed on the investor. When investors keep their debt and equity portfolio separately and rebalance it on their own they have to pay capital gains. But BAF makes it tax-friendly.
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BAFs help in generating low volatility equity-linked returns. They give you downside protection. Whenever there is a downturn or upturn they change the exposure in equity as per the proprietary model of the fund house.
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It is a low-risk product and thus a moderate return product. It will not outperform its index but will give you a return somewhere around the index performance.
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The investment tenure can’t be short. An investor must invest for a time horizon of 3-5 years. A systematic Investment Plan (SIP) is the best way to invest in BAF.
