A very popular category of mutual funds in which you must consider investing is the BAF or Balanced Advantage Fund. It offers you benefits like diversification and dynamic asset allocation that help you consistently grow your wealth over a long term by minimising risk. Read on to know how they work.

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What are balanced advantage funds and how do they work?

Some of the key features of balanced advantage funds are – dynamic asset allocation, equity investments, debt investments, and rebalancing. A balanced advantage mutual fund helps you balance risk and returns by dynamically adjusting its portfolio between equity and debt instruments. You can exploit market opportunities and minimise the risk posed to your portfolio by investing in the best balanced advantage fund.

Benefits of investing in balanced advantage funds:

Here are the key advantages of investing in balanced advantage funds –

  • They offer lower volatility when compared to equity mutual funds: Balanced advantage funds help you maintain the overall volatility of your mutual fund portfolio by investing in equities and debt. They strive to deliver reduced volatility when compared to pure equity funds. Hence, you can earn high returns while also reducing your overall portfolio risk by choosing a BAF investment. The lower volatility offered by BAFs help you navigate market downturns by minimising overall risk.
  • BAFs have a high growth potential: Since they also invest in equity, balanced advantage funds help you benefit from a high growth potential. Your BAF’s fund manager can increase the fund’s equity allocation in favourable market conditions with the aim of capitalising on potential gains.
  • You can use BAF investments to diversify across various asset classes: One of the many advantages of choosing a BAF investment is that you can easily diversify your investments through a BAF investment. Diversification helps you spread the risk across a variety of asset classes, thereby helping you considerably grow your returns and reduce overall risk.
  • BAFs are extremely tax efficient: The tax efficiency of BAFs depends on its asset allocation. If you have invested in a balanced advantage fund that has a higher equity allocation (65%), you can benefit from long-term capital gains tax rates on their equity holdings.
  • They are appropriate for a variety of risk profiles: Since portfolio diversification is a major advantage of BAFs, they can easily mitigate the risk of any mutual fund portfolio. BAFs follow a diverse equity allocation strategy that can accommodate investors with a moderate risk tolerance level.

Cons of investing your money in BAFs:

Here are the disadvantages of investing in a balanced advantage fund:

  • BAF investments pose a market timing risk: If you invest in a balanced advantage fund, you must rely on the fund manager’s capacity to time the market (i.e., predict market movements accurately). If the fund manager makes an error in interpreting signals or allocates adjustments at inappropriate times, it could result in you missing opportunities to grow your returns.
  • They offer potentially lower returns when compared to equity funds: Balanced advantage funds generally offer lower returns when compared to pure equity fund investments. This is because they primarily invest in debt-based instruments which generally offer a lower growth potential.
  • They are more expensive than index fund investments: Passively managed mutual fund schemes like index funds charge a lower expense ratio. BAFs, however, don’t fall under this category. They can often charge high fees that can diminish your returns in the long term.
  • Understanding how a BAF works can be difficult at times: The functioning of a BAF is not very straightforward as is the case with an equity or debt fund. BAFs can be complex when contrasted with equity or debt mutual funds.

BAFs offer you rebalancing, dynamic asset allocation, and diversification as advantages while investing. However, they also pose a market timing risk and offer potentially lower returns when compared to equity funds. You must research and compare the features of BAFs online before investing in them.