Balanced Advantage Funds
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Head of Financial Planning Literacy, DBS Bank24 Sep 2024
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Investing via Balanced Advantage Funds in a volatile market scenario

Balanced Advantage Funds (BAF) are getting increasingly popular as investors find them a suitable investment avenue for investing in a volatile market. Let us look at why and how BAFs can play a role in your investment portfolio to create wealth.

What are Balanced Advantage Funds?

Balanced Advantage Funds (BAFs), also known as dynamic asset allocation funds, are a distinctive type of hybrid funds that invest in both equity and debt instruments. Unlike traditional equity and debt funds that maintain fixed investment mandates, BAFs offer a dynamic approach to asset allocation.

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This flexibility enables them to increase equity investments when market prices are low and shift towards debt when equity prices are high. This approach not only capitalizes on market opportunities but also minimizes risks during volatile periods thereby making this funds particularly appealing to a myriad set of investors.

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Benefit 1: Higher potential returns with better stability

The core appeal of BAFs lies in their ability to balance the higher returns potential of equities with the stability of debt. This balance is key for investors looking to mitigate risk while enjoying the growth offered by equities. The well defined framework for investing in equity and debt with predefined minimum and maximum limits allows fund managers the flexibility to adjust the portfolio in response to market conditions, thus optimizing potential returns.

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Benefit 2: Flexibility in investment strategies and reacting to market changes

Investment strategies across equity oriented hybrid funds via a vis BAFs can vary significantly, often influenced by market conditions and the fund manager's outlook. Some funds adopt a pro-cyclical approach, investing in equities at high prices with the expectation of selling them at even higher prices. This strategy, while potentially more profitable, carries higher risks and is suitable for investors with longer-term horizons and a greater tolerance for market fluctuations. Conversely, BAFs employ a counter-cyclical strategy, by investing in equities when prices are low and reducing equity exposure when prices rise, which could appeal to more risk-averse investors.

It's important to note the distinction between BAFs and other hybrid funds like balanced or traditional hybrid funds. The latter typically maintain a constant allocation between equities and debt throughout the lifetime of the fund, which can limit flexibility in responding to market changes.

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Benefit 3: Tax advantages

The taxation of BAFs further enhances their attractiveness. Primarily treated as equity funds for tax purposes, BAFs benefit from more favorable tax treatment on capital gains compared to debt funds. Specifically, short-term capital gains in BAFs are taxed at 15%, while long-term gains are exempt up to Rs. 1 lakh per annum and are taxed at 10% beyond that threshold based on tax laws as per Finance Act 2023. In contrast, debt funds short term gains are added to the investor’s income and are taxed according to their income tax slab, while long-term gains taxed at 20% with indexation benefit until 31st March 2023. From 1st April 2023, gains from debt funds are added to taxable income of the investor at the applicable slab rates, which is further subject to surcharge and education cess.

BAFs are particularly well-suited for investors seeking to enjoy the growth potential of equities without too much exposure to their inherent volatility. They are especially appropriate for investors new to the equity markets or those with a lower risk tolerance. These investors might appreciate the moderate risk profile and the potential for higher returns compared to pure debt or traditional hybrid funds. Investors are advised to consider a minimum investment horizon of at least three years to truly benefit from what BAFs have to offer.

Source Tax Investment: A quick guide for NRIs while filing tax for the investment made in India - The Economic Times (indiatimes.com)

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In conclusion, BAFs serve as an excellent investment choice for those who wish to balance the growth potential of equity investments with the safety of bonds. They offer an investment avenue to generate superior post tax return on risk adjusted basis over 3 years and above, making them a prudent addition to the portfolios of both new and seasoned investors. As with any investment, it is crucial to align choices with one’s financial goals and risk profile, and maintain investment for a recommended period to optimize returns and minimize risk. Investing in BAFs could indeed be a smart move for those looking for a balanced approach to building their wealth.

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Disclaimer

This article is for information purposes only. We recommend you get in touch with your investment advisor for any financial advise.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

DBS Bank India Limited – AMFI registered Mutual Fund Distributor (ARN-155319)