Balanced advantage funds are an increasingly popular choice, touted as an all-in-one solution for investment growth and tax efficiency. But are they better than the combination of stocks and mutual funds?
Let’s compare balanced advantage funds, stocks and mutual funds across key metrics.
What are balanced advantage funds?
Balanced advantage funds are hybrid funds that invest in a mix of stocks, bonds and money market instruments. they aim to provide capital appreciation and stable returns over the long run. These funds dynamically manage the allocation between equity and debt based on the market conditions.
When the equity markets are bullish, a major portion of the corpus is allocated to stocks to maximise returns. However, when markets turn bearish, a higher allocation is given to debt securities to minimise losses. This flexibility to switch between asset classes based on the market outlook helps balanced advantage funds to generate stable returns for investors.
Balanced advantage fund returns suit investors with a moderate risk appetite and investment horizon of 3-5 years or more. Compared to direct investments in equity or debt, these funds with professional fund management are better equipped to navigate volatile markets.
How balanced advantage funds compare to stocks and mutual funds?
Balanced advantage funds provide exposure to multiple asset classes within a single fund. They aim to generate market-linked returns while reducing risk through diversification across asset classes.
Stocks have the potential for high returns but also the potential for high risk. Balanced advantage funds provide a more stable return profile by investing in a mix of equities and debt. They reduce risk through diversification while potentially providing equity-like returns in the long run. Balanced advantage funds may appeal to investors seeking more consistent returns than stocks alone.
Traditional mutual funds typically concentrate on a single asset class, such as equity or debt. Balanced advantage funds invest in a dynamic mix of multiple asset classes to capitalise on market opportunities while minimising risk. Their adaptable investment strategy based on market conditions has the potential to generate higher risk-adjusted returns than mutual funds.
Do BAFs offer better tax-saving options?
In terms of tax saving options, balanced funds offer few advantages. Since they invest in multiple asset classes, passing on the indexation benefit to investors is difficult. They are also prone to frequent portfolio changes, triggering capital gains taxes.
However, balanced funds provide more tax-efficient returns for investors in high tax brackets than fixed deposits and bonds. The tax treatment of capital gains and dividends also depends on the fund type, whether it’s a growth, dividend payout or reinvestment.
Bottom line
For those who prefer steady returns and don’t want too much risk, balanced advantage funds could be a good choice over stocks and equity funds. But for the best long-term returns and tax efficiency, having a mix of stocks, equity, and debt mutual funds might be even better than relying solely on balanced funds. The decision on what’s right depends on an investor’s financial goals, how much risk they’re comfortable with, and their tax situation.
Investors can build wealth and ensure a secure financial future by planning carefully and making the most of available tax benefits.
