One of the options in mutual fund investment is a balanced allocation between equity and debt. But how much balance is the best fit for your financial goals?

The answer isn't simple. Rather, it varies depending on the current finances, the goals and the allocation method. There are two ways to benefit from the hybrid funds, i.e., by balanced funds or balanced advantage funds.

The right option for you between the two becomes clearer once you understand the core features of both options. Let's explore the balanced fund and balanced advantage fund meaning and compare these two fund types to help you decide which aligns better with your financial goals.

What is Balanced Fund?

Mutual fund investments are made in debt or equity. Additionally, the options remain for collective investment in both equity and debt, which is referred to as hybrid mutual funds. Balanced funds are a type of hybrid mutual funds which involve investment in both funds. Here, the fund allotment is done such that 60% goes to one asset class, and the remaining 40% is divided between equity and debt.

The adjustment is further possible, but only up to a 20% range. So, out of a 40% investment, if there is 60% equity and 40% debt, then the equity can be reduced to 40% and the debt can be increased to 60%.

What is Balanced Advantage Fund?

Now let’s explore what a balanced advantage fund is. Balanced Advantage Funds (BAFs), also referred to as dynamic asset allocation funds, are similar to hybrid mutual funds in allocation of funds. But, they differ by lacking the restriction of a certain percentage as investment in equity and debt. Hence, the allocation can be moved between stocks and bonds depending on the market scenario. High market scenarios will involve shifting funds to debt, while market downtimes will involve investing in equity.

Difference Between Balanced Fund and Balanced Advantage Fund

The detailed insights into the difference between the balanced fund and balanced advantage among different parameters are as follows:

Asset Allocation

The balanced funds deal with a fixed allocation ratio, while the balanced advantage funds allow investment into different types of funds as per the market conditions and the investor’s goals. The 60:40 ratio dominates the fund allocation, where equity and debt get 60% and 40% or vice versa. The balanced fund also allows rebalancing in the range of 20%. The balanced advanced funds, however, do not require following any such ratio.

Risks

The fixed investments in balanced funds compromise the ability to adapt to the market conditions. Hence, the chances of risks are comparatively higher. It can be further managed with portfolio diversification. The balanced advantage fund allows flexibility, and hence, market risks are better dealt with in this scenario.

Returns

Owing to the poor flexibility with the market conditions, the balanced funds are risky. However, the balanced advantage fund, with better adaptability, offers better returns and even stabilises the investments during market downtimes.

Goals

The focus on balanced funds is to provide stable and consistent returns after a long period of investment. Considering balanced advantage funds, the aim is to protect the funds from market volatility and offer benefits during better market performance. It provides risk-adjusted returns.

Taxation

The tax implications on both balanced funds and balanced advantage funds depend on the equity allocation. Long-term investments and Systematic Transfer Plans (STP) can be among the effective strategies for better tax management.

Comparative Insights into Balanced Fund and Balanced Advantage Fund

The tabulated comparison to highlight the key differences between the balanced fund and the balanced advantage fund is as follows:

Wrapping Up!

Balanced funds and balanced advantage funds involve investment in hybrid funds, including both debt and equity. Yet, their method differs in allocation flexibility. While balanced funds allow fixed ratio-based investment, balanced advantage funds offer flexibility to adapt to the market. The choice between the two can be made based on the understanding of fund balance meaning, risk appetite, capital growth requirement, investment horizon and financial goals.

Sources:

• https://www.kotak.com/en/stories-in-focus/mutual-funds/balanced-funds-vs-balanced-advantage-funds.html

• https://bajajfinserv.in/investments/balanced-funds-vs-balanced-advantage-funds

• edelweissmf.com/investor-insights/mutual-fund-investment-tips-and-articles/balanced-advantage-funds-vs-balanced-funds

• https://www.goinri.com/blog/balanced-funds-vs-balanced-advantage-mutual-funds

• https://groww.in/blog/balanced-fund-vs-balanced-advantage-fund

The Tax is shown above is for general information only. Investors are advised to consult their Tax Consultant or Financial Advisor to determine tax benefits applicable to them.

The information herein is meant only for general reading purposes and the views being expressed only constitute opinions and therefore cannot be considered as guidelines, recommendations or as a professional guide for the readers. The document has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Recipients of this information are advised to rely on their own analysis, interpretations & investigations. Readers are also advised to seek independent professional advice in order to arrive at an informed investment decision.

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