Investors can explore balanced advantage mutual funds, also called dynamic asset allocation funds, to get the best of equities and debt bonds. These funds are flexible and can allocate capital in equity or debt instruments as per market conditions. So, if managed effectively, these funds can perform well even during a volatile market.
Benefits Of Balanced Advantage Funds
A balanced advantage fund does not have the same constraints as the equity hybrid fund and can allocate up to 80 per cent of its assets to equity and up to 30 per cent to debt. In addition, these funds can significantly cut or raise their allocation to debt and equity depending on the market conditions. Hence, these funds can give a better inflation-adjusted long-term return, more than a typical debt or balanced fund.
Different balanced advantage funds use various valuation indicators, such as profit-to-equity and profit-to-book ratio, to deploy assets dynamically. Some fund managers also use multi-factor models that incorporate more than two elements. Some balanced advantage funds may use pro-cyclical dynamic asset allocation models, which seek to protect the downside during bear markets while capturing the upside during bull markets. Pro-cyclical funds raise their equity allocation during bull markets and decrease it during bear markets.
Performance Of Balanced Advantage Funds
HDFC Balanced Advantage Fund has Rs 49,708 crore worth of assets under management (AUM), the highest AUM in the balanced advantage fund category. It has returned 6.07 per cent gains over the past month and 15.91 per cent in six months. Likewise, it returned 12.88 per cent in one year and 28.73 per cent in two years. However, the three-year return is 18.05 per cent. It has the second-highest AUM in the hybrid fund category. The SBI Equity Hybrid Fund has Rs 56,730 crore worth of assets under management, the highest in the class.
Another positive example of balanced advantage fund performance is the ICICI Prudential Balanced Advantage Fund. It gave 2.41 per cent and 8.75 per cent returns in one month and six months, respectively. It generated 6.7 per cent in one year, 13.98 per cent in two years, and 12.6 per cent returns in three years.
Risk Management
One of the most significant advantages of balanced funds is that they reduce your potential losses during volatile market conditions by balancing your exposure to debt and equity. When you invest in a balanced fund, the fund managers can maximise or minimise exposure to equities and debt. If the equity market becomes risky, they reduce the exposure by taking profits and investing in debt instruments. Hence, the strategy acts as a hedge against losses to generate stable returns.
Taxation
A significant benefit for balanced advantage funds may be equity taxation because they use derivatives to hedge. As a result, these funds typically benefit from equity taxation as capital gains are taxed at 10 per cent (without indexation) if held for more than 12 months and 15 per cent if the fund units are sold before 12 months.
