Mutual Funds: What are balanced advantage funds? 3 key advantages of investing in them

As per the age-old financial wisdom, investing should lead to a well-rounded portfolio with allocation to equity as well as fixed income instruments. This is important because equity gives healthy returns whereas debt gives downside protection to investors. 

What if the valuation of equity spikes, and the proportionate debt allocation is reduced to abysmally low? This ideally calls for an asset reallocation in order to keep the original debt-equity ratio intact.

This is what balanced advantage funds do and are therefore seen as dynamic in nature. No wonder then these funds are also referred to as ‘dynamic asset allocation’ mutual funds.

Let us understand more about them.

What are balanced advantage funds?

These are hybrid mutual funds with allocation to equity and fixed income instruments in a ratio that keeps changing according to the market conditions.  

There are 31 schemes, which fall in the category of dynamic asset allocation funds with total assets under management (AUMs) amounting to ₹2.34 lakh crore as on Dec 31, 2023, the AMFI data reveals.

In the past one year, these funds, as a category, have delivered a return of 19.50 percent, shows Morning Star data.  The 3-year annualised returns stood at 12.05 percent, Morning Star data shows.

ALSO READ: How to determine asset allocation in dynamic asset allocation funds?

The largest balanced advantage mutual funds based on the size of their assets under management (AUM) include HDFC Balanced Advantage Fund ( ₹75,739 crore), ICICI Prudential Balanced Advantage Fund ( ₹53,638 crore), SBI Balanced Advantage Fund (27,053 crore), Kotak Balanced Advantage Fund ( ₹15,492 crore) and Edelweiss Balanced Advantage Fund ( ₹10,179 crore).  

What are the advantages of investing in balanced advantage funds?

Although there are numerous advantages of investing in balanced advantage funds, or dynamic asset allocation funds. We list out the key three here:

1. Long-term investing: These funds are considered appropriate for those investors who have an investment horizon of longer than 3 years. The investors who are looking for long-term wealth creation and have a high-risk appetite can opt for these schemes over passive index-led funds.  

2. Dynamic investing strategy: Their investing strategy is dynamic yet simple i.e., to book profits during a bull market and to redeem them when they fall. These funds keep tweaking the allocation to different assets based on the market movement, and are not confined to one pre-defined ratio.

3. Flexibility: These schemes can raise allocation to equity beyond 65 percent and bring it lower based on the market conditions. So, their approach is not straight-jacketed but quite open and flexible. Although in theory, it looks innocuous, in reality, it offers significant advantages when the market is extremely volatile. 

For instance, when the market falls substantially, a lower allocation to equity and higher to fixed income instruments keeps the fund safe from wild volatility. 

Likewise, during a bull run, some part of debt allocation can be redeployed to equity to make the most of the jump in the broader index, thus standing true to their dynamic nature.