Balance is a term you would have certainly encountered at various stages of your life, usually with positive connotations. Your trainer at the fitness centre must have encouraged you to practice a balanced exercise regime while your physician would like nothing better than to see you having balanced meals. In every aspect of your life, from education and career to investments, the recurring advice is to maintain a balance. The main purpose of maintaining balance is to ensure that you get the best out of every experience – an optimal balance will enable you to progress at a steady pace while protecting you from negative eventualities. The mutual fund investment landscape has also realised the importance of balance, as can be seen from the rising popularity of Balanced Advantage Funds (BAF), popularly known as the fund for all seasons.
What is a Balanced Advantage Fund?
Balanced advantage funds can help you gain from equity as well as debt investments by creating a diversified portfolio across equity and debt instruments. They typically shift their exposure between equity and debt investments based on pre-determined investment criteria and depending on the market conditions – the investment in equity instruments can range between 30% to 80%, giving them flexibility to switch between equity and debt investments.
When equity markets start going up, balanced advantage funds can invest a higher amount in equities and take advantage of the growth opportunities that they offer. On the other hand, when equities start to fall, these funds can dynamically move a larger proportion of their investments to debt instruments. This will help them protect the portfolio from equity market volatility and limit losses. Further, by investing in debt instruments, these funds also protect the gains made from equity investments. Balanced advantage funds are well-suited for every kind of investor. For a beginner, they provide balanced exposure to equity investments by controlling risk exposure and reducing volatility, while for a seasoned investor, they can give the desired exposure to growth assets like equities.
Balanced Advantage Fund as the best bet
Many investors have a tendency to worry about the performance of their investments. Equity markets in particular cause a lot of stress since equity prices tend to move quite a bit in the short-term. On the other hand, equity investments can also potentially create long term wealth. Balanced advantage funds can be ideal as they can help you take advantage of upward moving equity prices and protect your portfolio when equity prices fall. Benefits of investing in a balanced advantage fund:
- Reduce the overall fluctuations in your portfolio
- Take advantage of upward moving equity markets, in a timely manner, through the equity investments in the fund
- Protect your portfolio from losses in downward moving equity markets, in a timely manner, through the debt investments in the fund
- No need to worry about timing market entry and exit since the fund dynamically reduces or increases exposure to equity markets based on pre-determined investment criteria and market conditions
Tax benefits for investors
Considering that balanced advantage funds maintain 65% allocation in equity and arbitrage, they offer you the tax benefits available on equity schemes, wherein, short-term capital gains (profit made on investments sold in less than one year) attract 15% tax while long-term gains (profit made on investments sold after one year) of Rs. 1,00,000 or below are exempt from tax. A 10% tax is applicable on long-term gains exceeding Rs. 1,00,000. This tax advantage, in addition to the benefits offered by these schemes, ensures that balanced advantage funds have a marked edge over other investment products, especially in the long run. Even though this fund offers you the tax benefits of a pure equity scheme, it also enables you to protect your portfolio through exposure to debt investments, thereby checking all your investment criteria boxes, i.e., growth, protection, and tax benefits.
Whether the market is up or down, balanced advantage funds ensure that your portfolio is balanced, i.e., well positioned to take advantage of positive market movements and protected from negative market movements. This is what makes a balanced advantage fund the scheme for all seasons.
Disclaimer: Mr. Niranjan Avasthi is the Head – Product & Marketing, Edelweiss Asset Management Limited (EAML) and the views expressed above are his own.
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