Balanced Fund vs Balanced Advantage Fund
In your investment journey, selecting a mutual fund scheme is a crucial investment decision. This can be especially overwhelming for newer investors when they come across several types of mutual fund schemes. Balanced funds vs balanced advantage funds are among the many choices that investors would need to make. Read on to learn more about these funds and how they differ.
Before delving deep into balanced funds and balanced advantage funds, let’s look at the three main types of mutual fund schemes.
Equity Funds – Equity mutual funds are funds that invest money in the equity shares of companies.
Debt Funds – Debt mutual funds are mutual fund schemes that invest money in bonds and other fixed-income instruments, including government securities.
Hybrid Funds – Hybrid mutual funds invest in multiple asset classes like equity and debt.
What are Balanced Funds?
Balanced funds are a type of hybrid mutual funds that invest in debt and equity. As the name suggests, balanced funds invest in asset classes in a balanced ratio. The funds follow a 60%-40% ratio while investing. This means that the funds will allocate 60% of the funds to one asset class, while the remaining 40% is divided between equity and debt.
There can be a change in the allocation of funds, but only by 20%. As a result, 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% of the funds.
What are Balanced Advantage Funds?
Similar to balanced funds, balanced advantage funds (BAFs) are also a type of hybrid mutual funds that allocate funds to both equity and debt. However, the key feature of these funds is that there is no restriction on asset allocation. These funds are also referred to as dynamic asset allocation funds.
Balanced advantage funds are dynamic and allocate funds depending on the market’s movements. For example, when markets are at their peaks, the funds might reduce the allocation towards equity and move them to debt. This helps preserve capital while generating income even in a down move. Since there are no restrictions on capital allocation, BAFs may allocate up to 100% of the funds towards one asset class. However, that is not common.
Comparative Analysis of Balanced Funds vs Balanced Advantage Funds
To further understand balanced funds vs. balanced advantage funds, let’s look at some of the key points of difference between the two types of funds.
Fund Allocation
The key point of difference between balanced funds and balanced advantage funds is the restriction on fund allocation and the investment ratio. In balanced funds, investment is done in a 60%-40% ratio. In the case of rebalancing, the funds allocated to either segment can be increased or decreased by a maximum of 20%. For balanced advantage funds, there are no such restrictions. These funds can allocate funds to the asset class in any ratio. As a result, BAFs are more flexible and dynamic.
Risks
Since both of these funds invest in equity and debt, there are risks associated with them. The performance of equity is correlated to the overall performance of the market, which highlights the importance of diversifying across various companies. Balanced advantage funds are better at handling risk since these funds can rebalance their portfolio in accordance with the market’s performance. These funds can lower their equity exposure when the market is underperforming, while balanced funds are unable to do so.
Returns
For any investment, returns are a key metric. Since balanced funds have to allocate funds in a predetermined specific ratio, they may not have the flexibility to adapt to changes in the market. As a result, balanced advantage funds provide better returns in favourable market conditions and help preserve capital when markets are not doing well.
Objectives
As mutual funds, the primary objective for both funds is to provide a favourable balance between the risks and rewards of investing. However, balanced funds primarily focus on delivering growth and stability in the long term, while BAFs aim to reduce the impact of market volatility to deliver risk-adjusted returns.
Tax Implications
The tax implications of the funds depend on the allocation of funds. Balanced funds are treated like debt funds if the allocation towards equity is lower than 65%, which is the threshold for the funds to be treated like equity funds. Meanwhile, balanced advantage funds can be taxed either as equity or debt funds. However, many funds aim to allocate 65% of the funds to equities to receive the same tax benefits as equity funds.
Difference Between Balanced Funds and Balance Advantage Funds
Given below are the key differences between balanced funds and balance advantage funds based on certain criteria:
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Balance Funds vs Balance Advantage Funds |
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Parameters |
Balanced Funds |
Balanced Advantage Funds |
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Fund Allocation |
Balanced funds allocate funds in a predetermined ratio of 60%-40%. |
There is no restriction on the ratio of fund allocation to an asset class. |
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Flexibility |
Investment is done in a fixed ratio, resulting in limited flexibility. |
Since there is no restriction on allocation, these funds are dynamic and offer higher flexibility. |
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Expense Ratio |
The expense ratio is lower since active asset allocation is less. |
Due to more active asset allocation, the expense ratio is higher. |
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Objectives |
The objective is to provide growth and stability in the long term. |
The objective is to minimise the impact of market volatility and provide risk-adjusted returns. |
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Potential Returns |
Returns are usually steady but depend on market performance. |
The potential to deliver higher returns is due to the dynamic and adaptive nature of the funds. |