3 min
05-August-2024
Balanced funds are ideal for investors looking for long-term wealth appreciation who are not bothered by market fluctuations or movements. On the other hand, balanced advantage funds are suitable for investors who want to take on a bit more risk, expecting higher returns when the market is progressing upward. However, due to fluctuations in market forces, these funds do not provide the same consistent returns.
In this article, we will look at the differences between balanced funds vs. balanced advantage funds, how they are similar in certain aspects, and which one you should opt for as an investor.
Balanced funds typically adhere to a 60%-40% investment strategy, where 60% of the funds are allocated to one asset class, and the remaining 40% are divided between equity and debt segments. This allocation is flexible within a 20% range, meaning the 60% portion can be reduced to a minimum of 40%, while the 40% portion can be increased to a maximum of 60%.
Balanced advantage funds are dynamic in nature and easily switch between different asset classes based on the market's movements. For example, when the markets get saturated and hit a peak of overvaluation, the value of balanced advantage funds starts reducing. This is when a fund manager or AMC will move the equity component of the fund to debt to ensure capital preservation and a constant stream of fixed income.
1. Asset allocation
A static asset allocation ratio of 60:40 is always followed in balanced funds. Either debt or equity will have a 60% or 40% allocation, and the remaining part of the fund will be invested in other financial and money market instruments.
In the case of balanced advantage funds, no such rule needs to be followed to maintain a specific fund allocation ratio. These funds have the flexibility to allocate between debt and equity based on any proportion that seems more effective based on market forces and sentiment.
Balanced advantage funds do not have any restrictions since there is no upper or lower limit for debt and equity segments. Hence, they are also known as dynamic asset allocation funds because they take advantage of market ups and downs to maximise earnings.
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However, balanced advantage funds will seem more attractive if you want something more flexible, a strategy that can make good gains during different market cycles and movements.
In this article, we will look at the differences between balanced funds vs. balanced advantage funds, how they are similar in certain aspects, and which one you should opt for as an investor.
What are balanced funds?
Balanced funds invest in a mix of equity and debt in equal measures. Hence, they are a type of hybrid fund. Most hybrid funds generally allocate capital to both equity and debt, but the proportion of one asset class can be slightly higher in terms of the percentage or ratio of the investment. However, in the case of balanced funds, the asset allocation is always in a balanced ratio—hence the name.Balanced funds typically adhere to a 60%-40% investment strategy, where 60% of the funds are allocated to one asset class, and the remaining 40% are divided between equity and debt segments. This allocation is flexible within a 20% range, meaning the 60% portion can be reduced to a minimum of 40%, while the 40% portion can be increased to a maximum of 60%.
What are balanced advantage funds?
Balanced advantage funds are a type of hybrid fund that invests in both debt and equity. However, what sets them apart from other hybrid funds is their flexibility in not following any pre-determined or fixed proportion when it comes to asset allocation. They also do not follow any rules regarding static allocations of any particular asset type in a fund.Balanced advantage funds are dynamic in nature and easily switch between different asset classes based on the market's movements. For example, when the markets get saturated and hit a peak of overvaluation, the value of balanced advantage funds starts reducing. This is when a fund manager or AMC will move the equity component of the fund to debt to ensure capital preservation and a constant stream of fixed income.
Key differences between balanced fund and balanced advantage fund
Here are some factors that differentiate balanced funds from balanced advantage funds:1. Asset allocation
A static asset allocation ratio of 60:40 is always followed in balanced funds. Either debt or equity will have a 60% or 40% allocation, and the remaining part of the fund will be invested in other financial and money market instruments. In the case of balanced advantage funds, no such rule needs to be followed to maintain a specific fund allocation ratio. These funds have the flexibility to allocate between debt and equity based on any proportion that seems more effective based on market forces and sentiment.
2. Rebalance of asset composition
Balanced funds can reallocate or switch between asset allocations by a margin of more than 20%. This allows them to shift allocation between different asset classes, such as reducing one component from a maximum of 60% to a minimum of 40%.Balanced advantage funds do not have any restrictions since there is no upper or lower limit for debt and equity segments. Hence, they are also known as dynamic asset allocation funds because they take advantage of market ups and downs to maximise earnings.
3. Objectives of the fund
While both these funds aim to strike the right balance between risk and reward for their investors, balanced funds focus more on delivering long-term growth while maintaining safety and stability. Balanced advantage funds function in the opposite manner by trying to beat the volatility of the market to achieve returns adjusted for risk. Balanced advantage funds use market dynamics and flexibility to optimise returns effectively.4. Returns
Balanced advantage funds are actively managed. As a result, they can yield better returns when market conditions are favourable and provide more stability when markets are uncertain. Balanced funds, on the other hand, are unable to do so since they have to meet specific allocation requirements. As a result, when markets are on a downward trajectory, balanced funds may not offer the same level of stability or potential for returns as balanced advantage funds since they will always have to maintain minimum fund requirements and cannot easily switch from equity to debt or vice versa.5. Risks
Risks are inherent in both funds since equity can pose a risk if not diversified well, while debt can also be risky if interest rates rise or if the credit quality of the debt instruments deteriorates. However, balanced advantage funds are at an advantage here as they can easily reallocate equity risk during market downturns by reallocating it to debt.Are you searching for the best mutual funds? Check out these different mutual fund categories for smart investing!
Balanced funds vs balanced advantage funds – A tabular comparison
Here are some of the features that make balanced funds different from balanced advantage funds:| Feature | Balanced fund | Balanced advantage fund |
| Investment strategy | Fixed allocation, typically 60% equity and 40% debt | Dynamic allocation between equity and debt based on market conditions |
| Flexibility | Limited flexibility (60%-40% to 40%-60%) | High flexibility in asset allocation |
| Risk profile | Moderately high due to fixed equity exposure | Varies based on market conditions; generally lower risk due to dynamic allocation |
| Return potential | Steady returns, dependent on market performance | Potentially higher returns due to adaptive strategy |
| Management style | Relatively passive | Active management to capitalise on market opportunities |
| Suitability | Investors seeking balanced exposure with moderate risk | Investors seeking adaptive strategies to minimise risk and maximise returns |
Similarities between balanced funds and balanced advantage funds
Despite the differences, these two fund types also have many similarities, such as;- Both are hybrid: Balanced funds and balanced advantage funds invest in equity and debt, making their fundamentals similar.
- Risk-reward balance: The primary aim of both funds is diversification to strike the right balance between risk and reward by investing in financial growth instruments and assets that generate a stable income.
- Risk management: Both these funds try to minimise and mitigate potential losses associated with equity by investing in bonds and debt that provide security.
- Diversification: To reduce the risk associated with too much exposure to one asset class, both the funds diversify their holdings across different sectors and companies.
- Investment horizon: Both these funds have a similar investment horizon of 3–5 years.
Which one should you choose?
When selecting between balanced funds and balanced advantage funds, the decision should depend on your investment goals, risk appetite, and investment maturity. Generally speaking, balanced funds are popular among conservative investors, while investors with a high to moderate risk appetite opt for balanced advantage funds.- Investors seeking stable returns with a low-risk tolerance and to build long-term wealth should lean more towards balanced funds. Balanced advantage funds do not deliver uniform returns as they fluctuate based on market conditions.
- Balanced funds have a lower expense ratio than balanced advantage funds since they are not actively managed and do not have dynamic asset allocation.
- Balanced funds are considered beginner-friendly because you do not have to time the market. Balanced funds provide you with a degree of flexible asset allocation, reducing the need to precisely predict market trends. On the other hand, balanced advantage funds suit a wide range of investors. Their performance is generally good when markets are rising, and they protect against market volatility.
- Balanced funds aim to provide long-term growth by generating stable returns. Balanced advantage funds aim to outperform the fluctuations and unpredictability of the markets by adjusting allocation to get the best possible results.
Conclusion
Balanced funds and balanced advantage funds have quite a few similarities and some unique differences that set them apart. The decision to opt for either of these funds should depend on your financial goals and risk-taking capacity. If you do not want to take on many risks and want your capital to grow stably and safely, balanced funds seem to align more with your goals.However, balanced advantage funds will seem more attractive if you want something more flexible, a strategy that can make good gains during different market cycles and movements.
