The first thing to know about such a fund is that it is the same thing as a dynamic asset allocation fund. A balanced advantage fund is something that offers you the benefit of a more ambitious return through investments in equity or arbitrage, while catering for risks through investments in debt markets. If this is too technical a definition, then let’s look at a simpler one.
When it comes to mutual funds, most of them have a fixed allocation for investments in debt and equity. For example, some funds may follow an 80-20 distribution where 80% is invested in equity and the remainder in debt. This split may be fixed, and the fund will always maintain a fixed distribution between equity and debt.
With balanced advantage mutual fund, the distribution between debt and equity markets may change depending on the market conditions. For example, if the valuation of equity market goes high, the fund may reduce its exposure to equity and increase exposure to debt. There is a simpler way to understand this too.
Let’s assume that the distribution between equity and debt is 80-20 today. If the market valuation of equity goes up, the fund can change the exposure from 80% in equity and 20% in debt to 70% in equity and 30% in debt. This is done to maintain returns and minimise losses as much as possible.
Disclaimer: The time periods and allocations mentioned above are purely for illustration purposes only. The actual allocations may differ from one fund to another.
Balanced advantage funds can help you take advantage of optimum risk profile along with returns and growth. But that’s not all; they can also help with taxes. Let’s see how these advantages are delivered to you.
Since the allocation between debt and equity is dynamic, such funds can offer more balanced risk and reward profiles. This means that if exposure to equity gets risky, the fund manager can change the current allocation and use debt to mitigate some of the risk.
Since the fund invests in both equity and debt, they are able to offer both returns and growth. The debt fund investments cater to the steady returns, all be it at a lower rate, and the equity investments offer slightly higher returns.
Just like most mutual fund investments, these funds also offer long term investment horizons. Which means that you need to stay invested for one, two or three years to see proper returns on your investment.
If you were to manage your investments on your own and decided to switch from equity to debt in the wake of high valuation in the equity market, you may be liable to pay taxes. This is so because you will end up withdrawing the equity investment, exposing yourself to capital gains tax and potential misreading of the markets leading to possible losses.
In a dynamic asset allocation fund, since the fund manager manages the assets allocation, you don’t have to worry about paying capital gains tax when the allocation changes. You also don’t have to worry about making the wrong call and losing money.
The answer to this question lies in your financial goals. If you are not averse to risks but still want steady returns, then such funds can serve you well. If you are willing to stay invested for a longer term, then such funds can be helpful. If you are not willing to take risks and are looking for quick returns (something which is not always possible in the world of market investments), then this is not the fund for you.