What is a Balanced Advantage Fund


Hybrid funds are a mixture of two or more asset classes.

They try to strike a balance between returns and risks.

The equity portion strives for capital appreciation to beat inflation and the debt portion strives for stability.

Hybrid funds can be either equity-oriented funds or debt-oriented funds.

best mutual funds

Hybrid funds can be divided in the following manner:

  1. Aggressive hybrid fund
  2. Conservative hybrid fund
  3. Multi asset allocation
  4. Equity savings fund
  5. Dynamic asset allocation fund
  6. Arbitrage fund


Additional reading: Click Here to read about how Inflation is destroying your hard earned money.

What is a balanced fund? 

A dynamic asset allocation fund is more popularly known as a balanced advantage fund.

A balanced advantage fund is a type of hybrid fund.

It invests in debt, equity and arbitrage positions although the allocation is not fixed and can also sit on cash if the fund manager desires so.

Unlike other hybrid funds like multi asset, aggressive and conservative, a dynamic asset allocation or a balanced advantage fund does not have a fixed mandate to follow.

The fund manager can move across different asset classes based on the prevailing market conditions.

The importance of a balanced advantage fund is more felt during a bearish market phase since it can cut down its equity portion and at the same time make periodic equity purchases in the dip.

This is unlike other pure equity funds who at all times have to maintain their mandate irrespective of the market situation.


Are you investing in the right mutual funds?

How does a Balanced Advantage Fund work?

The allocation in a balanced advantage fund can be divided into 3 different categories:

Active Equity

This refers to the un-hedged equity exposure portion of the fund


A portion of the equity allocation is hedged using derivatives, this method reduces volatility as well as the active equity portion.

The totality of the two, that is the hedged as well as the active equity portion at any given time should not fall below 65% to make sure the fund qualifies as an equity fund for tax calculation purposes.

Fixed Income

This would include the portion that invests in fixed deposits, government securities, etc. The idea is to generate returns while keeping volatility on the lower side, it is usually kept  at 35% in order to make sure the remaining 65% is invested in equity so as to allow the fund to qualify as an equity fund.


Additional reading: Click Here to read about some common myths & facts about mutual funds

Should you in a Balanced Advantage Fund?

A Balanced Advantage can invest in both equity and debt, the exposure to which can be dynamically managed based on the prevailing market conditions.

Such funds help in the sense they do your job of rebalancing which is necessitated by volatility which is a given with equity investing.

This should never be the only fund in your portfolio though but should rather be a part of it.

Every balanced advantage fund will a strategy of its own and that is usually based on valuation metrics like price to earnings (P/E), price to book (P/B) and dividend yield.

This is not an exhaustive list but only the usual factors are stated.

Such funds are slightly on the conservative side due to the option of cutting down their equity exposure in a falling market.

This creates an illusion that they are safer since they can up their allocation to debt which is not true since with debt you still need to be on the look out for credit and interest rate risk.

Balanced advantage funds can be considered for your initial steps into the world of equity investing but picking the one most suited for you is where the real planning comes into the picture.



Are you investing in the right mutual funds?

Benefits of a Balanced Advantage Fund

Most balanced advantage funds follow the age old investing pattern of buying low and selling high, therefore as an investor you need not worry about valuations when investing in a balanced advantage fund.

Balanced Advantage Funds are generally less volatile than aggressive hybrid funds and equity funds, therefore they can be a great first step for someone just starting out with equity investing.

Investing in any equity fund is not enough, one needs to monitor their investments periodically but this is not the case with a balanced advantage fund since the fund itself manages volatility by increasing and decreasing equity allocation depending upon the prevailing conditions.

A balanced advantage fund invests in equity, debt and fixed income instruments dynamically and therefore as an investor you need not worry about investing in various assets individually.


Disadvantages of a Balanced Advantage Fund

A balanced advantage fund will have some exposure to equities at all times which is subject to market risks.

The fixed portion of its portfolio will be subject to interest and credit risk.

Every balanced advantage fund will have its own strategy, the two most common of them being counter cyclical and pro cyclical.

A pro cyclical balanced advantage fund usually increases its equity allocation in a rising market whereas a counter cyclical balanced advantage fund decreases its equity allocation.

Therefore no two balanced advantage funds function in the same manner and one would need to be cognizant of the strategy applied and whether that strategy is aligned with their risk profile or not.

On top of this fund houses also have their own in house model to determine the equity allocation and quality of equity based on P/E & P/B ratio, dividend yield ratio.

If you’re someone who prefers stability over high returns than a counter cyclical fund would make sense and vice versa with a pro cyclical fund.

The issue is when a fund combines several strategies or consistently changes strategies making it difficult for you to gather the underlying approach in play.



For portfolio enquiriesemail us with your doubts at info@themutualfundguide.com

Disclaimer : While due precaution has been undertaken in the preparation of this article, The Mutual Fund Guide or any of its authors will not be held liable for any investments based on the above article. The above article should not be considered financial advice and has been published only for your perusal. Due credit has been given in case wherever required, in case you feel any part violates any rights then do get in touch with us and we shall get it duly removed.  
Mutual Fund investments are subject to market risks. Please read the offer document carefully before investing

Copyright © 2022  The Mutual Fund Guide, All rights reserved 

My Instagram