Balanced advantage fund are recently gaining popularity amongst advisors as they believe markets will remain volatile in the near term. They are widely recommended as a category to new investors too.
Balanced advantage or dynamic funds are where fund managers can increase or decrease equity allocation to the portfolio, using pre-decided formulas. Such funds allocate less to equities when market valuations appear expensive, and increase allocation to equities when market valuations seem cheap. The equity component in such funds varies from 30 per cent to 80 per cent, while at really cheap valuations some funds could even take it up to 100 per cent.
What is the biggest advantage of Balanced Advantage Fund category?
In a scenario where a fund lowers its equity exposure, it ensures that equity plus arbitrage component of the scheme is at least 65 per cent of the corpus, which helps it qualify for equity taxation.
Hence we see we get the best of both worlds:
- Safety of a debt fund without the high tax implications and
- Returns of an equity market with lower volatility
Picking the right fund in this category is not easy
While the other categories of mutual funds have a set criteria of debt: equity allocation, this category remains without any such rule. To add to this, the market cap of equity investments & ratings of debt instruments that these funds can invest in, has also been undefined. Hence, it is not easy to pick the right balanced advantage fund for your client.
What to look for when selecting the right balanced advantage fund –
1. Fund benchmark
The benchmark of the schemes within the balanced advantage category may throw some light about the scheme’s allocation pattern and fund manager’s style.
Below is a list of some funds and their benchmarks. You can get an idea which fund is more aggressive and which is comparatively more conservative in comparison to each other –
Data source: Value research (As on 30 Sept. 2018)
2. Investment policy
Every fund discloses its investment policy in its SID giving out the basis of changing allocation in debt and equity on the basis of market valuations. It will give you the basis of changing allocation between debt and equity in different market scenarios.
3. Past Performance
Post the SEBI reclassification, the fund houses had to either merge or rename existing schemes. Choosing one from the current lot of balanced advantage schemes on the basis of past performance, thus, may be misleading.
Thus, to use this as a basis in choosing the right fund, you may have to wait for a while.