Why are balanced advantage funds getting popular among investors? An explainer

Balanced Advantage Funds, also known as dynamic asset allocation funds, are one of the seven categories of hybrid mutual funds which do not have any restriction in deciding the proportion of allocation to different asset classes i.e., equity and debt instruments.

According to the Sebi’s categorisation, dynamic asset allocation funds make investment in equity/ debt that is managed dynamically (0 to 100 percent in equity and equity-related instruments; and 0 to 100 percent in debt instruments).

Unlike other six categories of hybrid funds, these schemes do not have any predefined ratio of allocation to asset class.

In other words, they invest in equity, debt and alternative assets in any ratio they feel is right, and remain completely free to tweak this allocation from time to time based on the changing market scenarios.

For instance, when the fund manager feels that the scheme is overinvested in equities and also that the market indices are overpriced then s/he can sell some of the equity and redeploy funds in debt.

Conversely, if stocks are available at cheaper valuations and the scheme has a higher allocation to gold and other fixed income instruments then the fund manager can sell some of the debt assets and invest the proceeds in equity assets.

Why should you invest in balanced advantage funds?

First and foremost, they are highly dynamic in nature and are not bound by any predefined ratio. This makes investment by these funds highly flexible.

Second, they offer the best of both worlds: equity and debt in the ratio that keeps changing as market conditions evolve with time.

Third, If your risk appetite is high and you prefer active mutual funds over passive schemes such as index funds, then you can opt for these funds.

Fourth: If you are aiming to meet financial goals in the long run, and are not in a hurry to meet any particular goal then these funds are meant for you. You believe in long-term wealth creation.

There are 29 schemes in the category of balanced advantage funds with total assets under management (AUMs) of Rs 2,11,100 crore as on July 31, 2023. A year ago, there were 25 schemes in this category with AUM of Rs 1,86,630 crore, reporting a 13.1 percent increase of AUMs in one year.

(Source: AMFI)

These schemes, as a category, have given an average return of 13.19 percent in the past 3 years and 9.18 percent in the past five years, shows the MorningStar data as on Aug 9.

Some of the popular balanced advantage funds include HDFC Balanced Advantage Fund with an AUM of Rs 60,880 crore, ICICI Prudential Balanced Advantage Fund (AUM of Rs 48,769 crore), Kotak Balanced Advantage Fund (Rs 15,061 crore) and SBI Balanced Advantage Fund (Rs 23,623 crore), shows the AMFI data.