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What Makes Balanced Advantage Funds Hot Picks For Investors?

What Makes Balanced Advantage Funds Hot Picks For Investors?

Balanced advantage funds claim to offer dynamic asset allocation with tax advantage. Do they deliver on that promise and should investors look at this category?

Mutual Fund
Mutual Fund

The balanced advantage/dynamic asset allocation segment by itself had net inflows of Rs21,106 crore during the third quarter, according to a recent Morningstar report.  

Generally, in the past, net inflows or outflows in the arbitrage category would usually be determined by whether the net flows in the allocation/hybrid funds is positive or negative. However, in 2021, given the rally in the equity markets, the net inflows in the arbitrage category have been relatively muted, while the balanced advantage/dynamic asset category has had extremely strong flows not just in this quarter but all through 2021.  

Balanced advantage funds promise to be the one-pot biryani meal, combining equity and debt into one and taking care of asset allocation on behalf of the investors, who would neither need to constantly keep an eye on the changing market dynamics nor worry about the tax hit a switch between equity and debt entails. But are these funds truly dynamic? Do they deliver all that they promise? Does it make sense to dive into these when individual equity and debt mutual fund categories may serve the purpose? 

Read here about which balanced advantage funds have given the highest returns and how they work: https://outlookmoney.com/magazine/story/to-create-the-perfect-mix-956 

Balancing Equity And Debt 

BAF as a concept has been around for quite some time now in the Indian markets, but has caught the fancy of investors in the last one year. The BAF category saw continuous outflow from March till December in calendar year 2020. After the 2020 correction, while the markets started moving up, memories of the March 2020 fall were still fresh in investors’ minds, and expecting volatility, they started putting money in BAFs. This category saw inflows in each month of 2021. The allocation/hybrid category received net inflows of Rs 1,02,459 crore in 2021. This was after net outflows of Rs 53,196 crore in 2020. The assets of allocation/hybrid category as of December 2021 totalled to Rs 4,70,522 crore, up by 5 per cent since the last quarter and 48 per cent compared with December 2020.  

Read about how inflows have been in balanced advantage funds here

The main benefit of BAFs and the risk-return framework that the category provides is that investors need not try and time the market. Fund managers do the asset allocation on your behalf as per the market conditions and the investment objective of the scheme. This way, your downside is limited and there is an opportunity of growth as well. 

BAF Table with ReturnsBAF Table with Returns

Tax Advantage 

When you do asset allocation on your own, every switch-over or exit triggers tax lability, either short term or long term. In a BAF, you put your money for the long term and somebody takes care of it within the fund; so, there is no tax liability. This gives BAF an added advantage. 

Who Should Invest? 

While all kinds of investors can put their money in BAFs, as a category, it also provides a solution for first-time investors or investors who hitherto were under-allocating to equities 

Combining BAF with solutions like systematic withdrawal plan for customised cash flow generation, taxation efficiency, model-based approach, discipline, and more, are some of the other features that work in favour of BAFs.  

During periods of heavy drawdowns, such as the market fall in March 2020 at the onset of Covid, BAFs helped in protecting downside. Participation in the upside that came after, was also satisfactory. Thus, investor experience has been good overall. 

How To Choose? 

Investors can use BAFs as a part of their portfolio, but this category shouldn’t be the entirety of the portfolio. You need to carefully choose as all BAFs are not the same. (Click here to know about how to select a mutual fund)

From a regulatory point of view, they are free to decide on their asset allocation and investment strategy. This technically means that BAFs can take exposure to equity and debt from 0-100 per cent in either asset class. However, to take advantage of equity taxation, they need to have 65 per cent gross allocation in equity. 

In a BAF, the allocation to equity can broadly range between 30 per cent and 80 per cent, hence giving enough cushion to the fund manager to manage volatility and offer superior risk-adjusted returns over a longer horizon. 

Read about the investment strategy that the fund is following and see if it suits your needs. Select accordingly.  

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