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A balanced advantage fund (BAF) is a hybrid mutual fund that can invest in equity as well as debt.

BAFs always maintain an underlying gross equity exposure of 65% of their assets to be taxed as equity funds. This means capital gains in them are taxed at 15% if redeemed within 1 year. Capital gains in BAFs are taxed at 10% for gains over 1 lakh, if redeemed after 1 year. BAFs typically use derivatives such as futures and options to reduce the unhedged equity exposure as per the fund manager’s call.

BAFs are expected to generate returns for investors through stock selection, bond selection and asset allocation (shifting between equity and debt at the right time).

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