Both Balanced Funds and Balanced Advantage Funds are categorised under Hybrid Funds. The difference is that Balanced Hybrid Funds invest in equity as well as debt in a balanced ratio whereas Balanced Advantage Funds shifts the corpus between debt securities and equities as per the prevailing market circumstances and hence, are also called Dynamic Asset Allocation Funds.
Difference between Balanced Funds and Balanced Advantage Funds
|Parameters||Balanced Funds||Balanced Advantage Funds|
|Basic Feature/Characteristic||Invest in equity and debt in ratios that have balanced exposure to both; can be equity or debt oriented depending upon the slightly higher exposure to any particular asset||Allocate funds to asset classes dynamically as per the market conditions|
|Fund Category||Hybrid but have narrow band flexibility (40-60% equity allocation)||Hybrid with more freedom to shift the corpus between assets|
|Risks||Moderately High (offer growth and stability of equity & debt)||Moderately High (switch between growth and stability as per the market)|
|Returns||Can yield high returns if equity exposure is higher but due to investment mandate, funds allotted to equity cannot be increased after a certain limit||Can yield high results whenever the markets are in favor and equity exposure is high|
|Taxation||Taxed as any Equity Fund||Taxed as any Equity Fund|
|Investment Horizon||Long term; minimum 3-5 years||Long term; minimum 3-5 years|
What are Balanced Funds
Balanced Funds are the mutual funds that invest in all assets in a balanced proportion i.e. 40%-60%. Balanced exposure to stock and bond instruments help in both capital appreciation as well as income generation. It also balances market risks. Some of the stocks may be conservative in nature by having a little higher exposure to debt and bond securities but yield higher returns than the pure bond fund or money market instruments. They are called Balanced Hybrid Funds which may be equity oriented/aggressive or debt oriented/conservative depending upon its fund allocation to a particular asset. Its holdings include both high and low risk instruments.
Also Read: Best Balanced Funds to Invest in 2020
What are Balanced Advantage Funds
Balanced Advantage Funds are a type of Hybrid Mutual Funds in which the fund corpus is dynamically allocated to equity or debt based on prevailing market conditions. Unlike Balanced Funds, where the equity allocation oscillates between 40% to 60% and the rest to debt or vice-versa, here the equity allocation is 33% while 33% is in arbitrage so that overall equity exposure goes up to 65%. It aims for wealth generation but also offers stability and security from market volatility.
Know About: Best Balanced Advantage Funds to Invest in 2020
Comparative Analysis of Balanced and Balanced Advantage Funds
- Asset Composition
As mentioned above, the asset composition of Balanced Funds are 40-60% for equity and debt, while it is 33% fixed for equities & 33% in arbitrage for Balanced Advantage Funds. The latter’s asset composition changes according to the fund allocation done as per market expectations.
- Returns on Investment
Both have the potential to give high returns but Balanced Advantage Fund gives better risk adjusted returns. It makes the best of market volatility because of its greater flexibility as they shift the money into bonds when markets get expensive but Balanced Funds cannot decrease its equity investments after a limit.
At the same time, Balanced Advantage Funds do not give uniform returns. It varies as per market trends as well as mutual fund schemes. Therefore, many experts believe that it is better to go for Balanced Funds for a long term plan of wealth creation where short term market volatility shouldn’t matter.
Risks are associated with both as both are equity funds and both promise some security and stability of debt and bonds, however, Balanced Funds have a more balanced approach and are often a better choice for controlling risks to many investors. Balanced Advantage Funds are capable of giving downside protection by dynamically managing the assets against earnings uncertainty.
Both are taxed as per the norms of Equity Funds. Since it is advised to hold on to these investments for the long term, we will be calculating the tax on long term capital gains. Like all equity funds, capital gains up to Rs. 1 Lakh (after 1 year) are exempted from taxation, and the rest is taxed at 10% as per the taxation norms of Equity Funds. For example, an investor makes capital gains of Rs. 2 Lakh, then Rs. 1 Lakh is exempted from tax and the remaining Rs. 1 Lakh will be taxed at 10%. Thereby, the payable long term capital gains tax at remaining Rs. 1 Lakh is Rs. 10,000.
If the s/he redeems the fund in less than a year, then the capital gains will be taxed at 15% and no tax exemption will be provided. In that case, the payable tax on Rs. 2 Lakh would be Rs. 30,000.
Balanced Funds v/s Balanced Advantage Funds- Which one to choose?
Conservative investors may go for Balanced Funds where their money is directed towards wealth generation from equities but also safeguards and balances out the losses (if any) by investing in debt instruments. Balanced Advantage Funds may suit a large bandwidth of investors as it has the capacity to deliver results in the backdrop of high valuations, but it is suggested for investors with moderate risk appetite.