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What is the difference between a Balanced Fund and Balanced Advantage Fund?

The market offers multiple types of mutual funds of investment instruments for you to pick from. And, sometimes this wide variety can make it a little difficult to spot the differences between the different types of mutual funds. The case is more so with balanced funds and balanced advantage funds since they are similarly named. To understand the difference, let’s take a deeper look into these two types of funds.

Balanced fund vs. Balanced advantage fund

Both these funds fall under the category of hybrid funds. Balanced funds allocate money in debt and equity in a balanced ratio. On the other hand, balanced advantage funds shift your money between equities and debt securities based on market conditions.

What are balanced funds?

Balanced funds maintain a balanced proportion of investment in all assets, i.e., 40%-60%. If you have a balanced exposure in stock and bond instruments, you can enjoy both income generation and capital appreciation. The right proportion also helps you balance market risks.

What are balanced advantage funds?

These funds dynamically shift money between equity and debt, depending on the prevailing market circumstances. When markets are rising and have reached peaks, these funds reduce exposure in equity and shift funds to debt. Consequently, even if the market witnesses a decline, the profits made from the funds remain intact. Its objective is wealth creation, but it also provides stability and security from market volatility.

How are balanced funds different from balanced advantage funds?

Balanced funds provide long-term growth and stability. Balanced advantage funds, on the other hand, provide risk-adjusted returns.

Balanced funds allocate 40% to 60% in equity and debt. For balanced advantage funds, the asset composition is fixed at 33% for equities and 33% for arbitrage. Asset composition of the latter changes based on fund allocation conducted as per market conditions.

Balanced funds invest in bonds and equities with a predetermined objective. Balanced advantage funds alter their allocation depending on the market fluctuation. When equity market valuation is high, they switch their exposure to the bond market. These funds benefit from arbitrage opportunities in the equity derivatives market.

Both these hybrid funds can deliver high returns. However, balanced advantage funds usually give better risk-adjusted returns. They allocate funds based on market conditions and make the best use of volatility. They have greater flexibility and shift the corpus into bonds as markets get expensive. This is not the case with balanced funds. It cannot reduce its exposure to the equities market after a limit.

However, advantage funds do not give constant returns as they change depending on mutual fund schemes and market trends. Thus, experts usually recommend that you go for balanced funds if your objective is long-term wealth creation. This is because short-term market volatility doesn’t have a role to play in balanced funds.

The expense ratio for balanced funds is usually low. However, since the other is dynamic in asset allocation, the expense ratio can be high.

Both are equity funds, and therefore, come with risks. Both claim to deliver some security and stability of bonds and debt. However, if you had to compare the two, balanced funds have a more balanced approach. Investors investing in balanced funds can have a better chance of controlling risks. Balanced advantage funds can give downside protection by managing the assets dynamically as per market volatility.

The taxation norms for both funds are similar to equity funds. It is usually recommended that an investor holds on to these investments for the long term. Consequently, tax calculations are on long-term capital gains. As is with equity funds, you are not liable to pay tax on capital gains up to ₹1 lakh, provided you are holding on to the funds for one year. For capital gains above ₹1 lakh, the tax calculation is at 10%.

For instance, if an investor earns long-term capital gains of ₹1.5 lakh, he can exempt ₹1 lakh from taxes and pay 10% on the remaining ₹50,000. Thus, the tax payable on long-term capital gains equals ₹5,000.

If the investor decides to redeem the funds before one year, then tax is calculated on capital gains at 15% without any tax exemption. The tax payable in this scenario will be ₹22,500.

In conclusion

After understanding the differences between the two funds, you can make an informed decision. You can choose between the two types of funds based on their investment objective and risk appetite. However, remember to carefully compare similar funds from other fund houses before making an investment decision.

The objective of any investment is high returns. However, an investor must know that high returns always come with the risk of high volatility. Balanced advantage funds can help you generate good returns in the long with low volatility. Thus, they are considered to be well-suited for medium-risk appetite investors.

Categories: Investing