Balanced Advantage Mutual Funds: Expert explains advantages, key risks and details investors must know before investing

Balanced Advantage Mutual Funds: Mutual funds are a popular investment option today and there are many fund houses, schemes, and types of mutual funds that are available for investors to choose from. One of these is the Balanced Advantage Funds (BAFs). These are also called Dynamic Asset Allocation Funds because these funds can adapt to the dynamic capital market easily. 

According to Vivek Goel, Joint Managing Director, Tailwind Financial Services, BAF is among the most popular categories in the mutual fund space today, and as of October 2022 it has the highest Assets Under Management (AUM) under hybrid schemes with over Rs. 1.9 lakh crores being managed across 27 schemes.

What are Balanced Advantage Mutual Funds?

Balanced Advantage Funds, popularly referred to as ‘BAF’ are hybrid mutual funds that invest in both equity and debt instruments. This category was created by the Securities Exchange Board of India (SEBI) in October 2017 when they introduced formal categorisation of mutual fund schemes under the Equity, Debt, and Hybrid categories. 

While there are seven sub-categories under Hybrid funds, what differentiates BAF from others is its dynamic asset allocation whereby these funds have complete flexibility to shift between equity and debt allocation based on their view of the markets.

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How does BAF work?

Balanced Advantage Funds work based on a fund house's internal valuation strategy or model. When equity valuations are cheap, fund managers increase their equity exposure and when valuations are expensive, the fund reduces equity exposure and increases its allocation to debt. Thus, by gauging valuation, sentiment, and other market indicators, BAF funds change their asset allocation.

Expert opinion: 

Benefits of investing in Balanced Advantage Mutual Funds

According to Harish Krishnan, Senior EVP & Fund Manager (Equity), Kotak Mahindra Asset Management Company, BAF help in getting a better risk-reward experience. “BAFs help investors allocate assets on the basis of in-house models, thus exhibiting lower volatility, and when opportunities open the funds are moved towards equities to achieve better returns – thus offering a better risk-reward experience,” he said.

According to Omkeshwar Singh, Head RankMF, Samco Group, BAF is good for beginners as it gives growth with stability, and gives tax leverage.

BAF is a good scheme as firstly, for beginners, the volatility is managed better compared to only pure equity schemes. Secondly, it gives growth with stability, i.e - investing in equity for growth and debt for stability. Thirdly, it takes care of asset allocation, and lastly, it helps in tax leverage, as most balanced advantage funds hold equity portions to have equity taxation. 

Points To remember before investing in BAF

1. Lower returns than equity-only schemes

2. Investors should consider their risk profile and financial goals before making investment decisions.

3. Investors should read the scheme information to understand the fund’s strategy to understand how the particular scheme is managed and the volatility that may be expected.

4. Even though BAF aims at providing stable returns, the ideal investment horizon would be 3 to 5 years given that the allocation in equities can lead to negative returns in the short term.

5. Investors should check the past performance of the fund house and particular scheme and compare it with peers to check for consistency of performance in bull and bear markets
 
Risks involved in investing in BAF

1. The key risk involved in the short term comes from the allocation to equity which may turn out to be volatile in the short-term leading to negative returns for the investors, hence the ideal investment horizon should be at least 3 to 5 years.

2. Dynamic allocation between equity and debt is based on the fund house’s own model, the results for a scheme may vary significantly based on the efficiency in timing of entry and exits, hence reviewing track records for consistency is important.

3. Even though a scheme’s portfolio is diversified within equity and debt, it is important to review if the scheme is taking a higher risk by allocating higher amounts to mid/small cap within equities or AA / A rated papers within the debt.

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