A primer on balanced advantage funds. How are they different from balanced funds

Kavya Balaji   /   October 9, 2020
balanced advantage funds

Investors who chose to invest in the Systematic Investment Plans (SIP) of balance advantage funds now enjoy better returns than those who chose pure equity plans. SIP data shows that the average returns for the three-year period from the balanced advantage fund category was 2.8%. In comparison, the large-cap funds category has returned 0.27% and the midcaps category has given -4.7%. Investors in small-cap funds have lost 8.4% in three years. The broad market had slid by more than 25% this year because of worries over the coronavirus and a possible world recession, while it has come back to 11,800 levels as we publish this article. With uncertainties still looming large, investors might be looking at balance advantage funds, as a way to hedge the risks.

What are balanced advantage funds?

Balanced advantage funds are a result of the re-order of hybrid funds by the Securities Exchange Board of India (SEBI). They are dynamically managed equity mutual funds that alter their equity allocation depending on market valuations. The equity allocation is generally between 30% and 80%. The funds consider the fundamentals of the stock or market for making the allocation. When valuations are high, they reduce their equity allocation and increase it when valuations are low. The have the flexibility for dynamically shifting their assets to and from equity or debt. Even though the funds? objective is capital appreciation, they seek to guard against volatility.

Exposure of the fund to equity or debt securities in higher/lower ratios is completely at the discretion of the fund manager. They invest in different securities based on the market conditions. The fund will adjust the direct equity exposure based on whether the valuations of the stock or the market is expensive or cheap. This could be on the basis of price-to-book (PB) value or the price earnings ratio. For instance, if the market?s PB value ratio is when compared to historical averages, the fund will increase its direct stock exposure and rely less on arbitrage and vice versa.

Strategies for investments vary from one Asset Management Company (AMC) to another. For instance, HDFC Balanced Advantage Fund, which had Rs 32,369 crores of Assets Under Management (AUM) as of March 2020, had an 82.11% allocation to equities, while Sundaram Balanced Advantage Fund had a 67% allocation. The balance of the fund?s portfolio is allocated to arbitrage and debt in such a way that the equity and arbitrage components are always more than 65% of the portfolio.

How are they different from balanced funds?

Balanced funds generally have a fixed ratio for investing in equities and debt and don?t have much flexibility. There are two types of balanced funds. One is debt-oriented and the other is equity-oriented. An equity oriented balanced fund is one where the equity exposure is 65%-100% while the debt part is 0-35%. Debt-oriented funds allocate 5%-25 % to equity and the rest to debt.

The allocation is about 65-80% in equity for equity oriented balanced funds whereas for balanced advantage funds, pure equity investments are split between equity, arbitrage and debt. Generally, about 33% is in equities and 32% in arbitrage to keep the equity investments at around 65% and they invest the rest in debt. So, balanced advantage funds are considered less risky when compared to plain balanced funds.

Pros of investing in balanced advantage funds

Balanced advantage funds draw certain advantages over other common funds as follows:


The majority of these funds look for significant yields from arbitrage opportunities. In any case, the fund managers move the assets into safe securities when valuations go higher. The dynamic asset allocation of these funds helps in receiving rewards of higher returns while shielding the fund from possible volatility. It gives more significant yields than debt funds and is comparative in structure to equity funds that are a little more flexible.

Diverse portfolio

The dynamic distribution of assets gives balanced advantage fund managers adaptability and investors are able to get a diverse portfolio. Since there is a constant moving of assets according to market and economic situations, the portfolio will remain diverse.

Relatively safer

Balanced advantage funds are generally less unpredictable and more secure than other equity funds as when markets are expensive, the asset allocation to debt securities is increased. This acts as a shield for the fund. Also, the converse is done when the market is favourable. Investors get higher risk adjusted returns because of the equity and debt allocation changes.

Who should you invest in these funds

If you want to earn higher returns from equity investments and at the same time stay guarded against market volatility, then this fund could be for you. Those who are looking for long-term wealth creation and are willing to remain invested for a tenure of 3-5 years can look at balanced advantage funds. Note that these funds are not for investors who are very risk averse or those who want regular income from funds.

The only con to balanced advantage funds is that they have higher expense ratios. Fund options such as aggressive debt funds or large cap funds might be better if you are looking at costs. It is also important to check the fund?s portfolio as not all funds go for arbitrage.

Don?t know whether these funds are right for your portfolio? Get in touch with consultant at Wealthzi.com.

Check out Explore Funds section.

Tags: , ,