Mutual funds are offered in different variants and investors can choose the fund that they want. Equity funds offer good returns but have a high volatility risk and debt funds have very low volatility but have low returns. For investors looking to have the best of both worlds, hybrid funds are available. Hybrid mutual funds are those which combine both equity and debt investments giving you stable yet attractive returns.
Hybrid mutual funds are also sub-divided into different categories. Balanced funds and balanced advantage funds are two such sub-divisions of hybrid funds. Both these funds are different from one another though they share a similar name. So, let’s have a look at what these funds are and how they differ from each other –
What are balanced funds in India?
Balanced mutual funds are aggressive hybrid funds which invest at least 65% of their portfolio in equity and equity-oriented securities. The asset allocation to equity can also go up to 80% but it never falls below 65%. The remaining portfolio is invested in debt and money market instruments for stability in times of market volatility.
What are balanced advantage funds in India?
Balanced advantage funds are also called dynamic asset allocation funds. These funds allocate their portfolio to equity, equity derivatives and debt instruments. Balanced advantage funds in India are required to maintain at least 65% equity exposure but this exposure can include both equity and equity derivatives.
Similarities between balanced and balanced advantage funds in India
Both these funds have the following similarities –
They are a sub-type of hybrid mutual funds
They have a minimum of 65% equity exposure
They attract equity taxation wherein long term capital gains are tax-free up to INR 1 lakh and excess returns are taxed @10%
They offer stability and attractive returns on your investments
Differences between balanced and balanced advantage funds in India
Though these funds look similar, they are quite different from one another. These differences include the following –
Balanced fundsBalanced advantage fundsThese funds invest at least 65% of their portfolio in direct equityThese funds invest at least 65% of their portfolio in equity. This equity allocation can include an allocation to equity derivatives too which is not allowed under balanced fundsThese funds more or less follow a fixed asset allocation approach where equity exposure is high and there is a narrow scope of changing the allocated portfolioThese funds follow a dynamic asset allocation approach where equity allocation can be dynamically changed between direct equity and equity derivatives as per the prevailing market conditionsThese funds have a moderately high risk since equity exposure cannot fall below 65% even when the market is overvalued or highly volatileIn an overvalued or volatile market, balanced advantage funds can reduce their exposure to direct equity and choose equity derivatives to bring down the portfolio risk. That is why these funds offer a comparatively lower risk compared to balanced fundsThese funds would not generate a very good return in a flat marketEven in a flat market, the best balanced advantage funds offer good returns due to the arbitrage component of their portfolio
What you should do?
Balanced advantage funds offer better returns and lower risks while balanced funds limit the extent of loss due to their debt component. You should, therefore, understand the mechanisms of both these funds before choosing to invest in anyone. Also, remember that these funds are equity-oriented and would be suitable if you have a healthy risk appetite. So, assess your risk profile and investment strategy and then choose a suitable fund.
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