The Indian mutual fund market is seeing an uptick in interest towards Balanced Advantage Funds (BAFs), especially as market volatility and economic uncertainties drive investors toward options that balance both growth and stability. BAFs, also known as Dynamic Asset Allocation Funds, have gained traction as they combine the potential for equity growth with the relative safety of debt investments. For investors seeking returns with a cushion against market fluctuations, Balanced Advantage Funds offer a compelling option.

This article delves into what makes BAFs the theme for the current Indian mutual fund market, and why they could be an ideal choice for today’s investing environment.

– Understanding Balanced Advantage Funds (BAFs)

Balanced Advantage Fund (BAF) also known as Dynamic Asset Allocation. It is a type of hybrid fund that is a mix of equity and fixed income in the portfolio. The asset allocation of the Balanced Advantage Funds changes dynamically according to the market conditions. The asset allocation in Balanced Advantage Fund is determined by the dynamic asset allocation model of the fund. By using a model-based approach, Funds invest in equity securities and balance the risk by investing in debt when equity valuations are not favorable.

– Why Are BAFs the Theme Right Now?

1. Volatile market Conditions

The Indian equity market has seen considerable volatility, with domestic and global events such as inflationary pressures, interest rate fluctuations, and geopolitical tensions affecting investor sentiment. In such conditions, funds that can dynamically adjust asset allocation are particularly appealing. BAFs allow investors to benefit from equity markets during bullish trends while cushioning losses during downturns by increasing debt exposure.

2. Mitigating Risk with Flexibility

BAFs’ ability to switch between equity and debt based on market conditions allows investors to avoid the timing pitfalls often associated with equity investments. For instance, when the equity market valuations are high, BAFs may move towards a higher allocation in debt, protecting investors from potential overvaluation risks. This adaptability makes BAFs an attractive proposition for risk-averse and moderate-risk investors.

3. Tax Efficiency Compared to Traditional Debt Funds

Many Balanced Advantage Funds are treated as equity funds for taxation purposes, provided they maintain an equity exposure above a certain threshold. This means gains from BAFs held for more than one year are taxed at the lower long-term capital gains rate, which is currently 12.5% beyond ₹1.25 lakhs (as of recent tax laws). For investors seeking tax-efficient options with debt-like safety, BAFs offer a notable advantage over traditional debt mutual funds.

4. Requires Less Monitoring:

A Balanced Advantage Fund offers a simple, one-stop solution for diversifying your portfolio across equities and bonds, saving you the time and effort of managing multiple investments. You only need to monitor one fund, as long as it aligns with your investment goals and risk tolerance.

– Comparison Between Balanced Advantage Funds and Large Cap Funds

Indian Markets showed significant volatility from May 2024 to September 2024 influenced by mix of global & domestic factors. Globally, concerns over economic stability & geopolitical tensions impacted investor sentiments. These factors led to fluctuations in foreign institutional investment flow, with many investors withdrawing capital from emerging markets like India in favor of more stable returns in developed market. Political uncertainty also contributed to market instability, as investors remained cautious about potential changes in economic policies.

Let us see how volatile Balanced Advantage Funds as a category has been as compared to Large Cap Funds.  

 From the above mentioned data we can see that Balanced Advantage Funds have lower Beta as compared to large cap funds, maintaining stability to the overall portfolio. Thus, Large cap funds have been more volatile to Balanced Advantage Funds.

– Top 5 Performing Schemes in Balance Advantage Funds

The above table shows the returns from 6 months to 7 years of top performing schemes of Balanced Advantage Funds.  From these top performing schemes we can see that Balanced Advantage Funds give stable returns.

– Average Asset Allocation in Balanced Advantage Fund

The above table shows that on an average, Balanced Advantage Funds invest more in Equity (66.64) than Debt (25.02) and others (8.34). This makes them a better option to invest in because it gives good returns (equity) and stability (debt). This prevents an investor from facing any kind of loss as compared to other investment options. The others in the Balanced Advantage Funds may contain REITs, Gold etc.

– Who Should Consider Investing in BAFs?

Balanced Advantage Funds are suitable for a wide range of investors:

• Risk-Averse Investors who want market exposure without committing entirely to equities.

• First-Time Investors who are new to mutual funds and prefer a balanced approach to learn about market fluctuations.

• Long-Term Investors seeking steady returns without the extreme volatility associated with equity funds.

Conclusion:

In the context of the current Indian market landscape, Balanced Advantage Funds have indeed become a preferred theme for many investors. Their ability to adapt to market conditions while offering both growth and stability makes them highly relevant in today’s uncertain market. As more investors look for investments that balance risk and reward, BAFs are poised to remain a key part of mutual fund portfolios.

For individuals aiming to achieve a balanced approach to wealth creation, BAFs offer an appealing mix of flexibility, stability, and tax efficiency, making them a standout choice in the present mutual fund landscape in India.

To understand more on the topic as well as to start investments please feel free to contact us:

Phone: +91-9324609115

E-mail: team@richvikwealth.in

The article is authored by Ms. Ritika Sharma from Team RichVik.