Balanced Funds vs. Balanced Advantage Funds: Difference & Features

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With the changing lifestyle and the increasing cost of living, having multiple sources of income is essential to lead a decent lifestyle. Investing is one of the best ways to generate an additional source of income. You can invest in several financial instruments, from stocks to mutual funds.

Mutual funds are quite popular among investors. These can be of various types, making it tricky to choose the right one. Thus, this blog will specifically talk about balanced funds and balanced advantage funds. So let's get started.

What are Balanced Funds?

Balanced funds are also known as hybrid funds. They are a type of mutual fund that invests in equities and debt, unlike other hybrid funds that may favour one category more than the additional, balanced funds that aim for a balanced approach.

In these funds, around 60% of your money is invested in one of the categories, and the remaining 40% is divided between equity and debt. While there is some flexibility, you must stay within this 60-40 split. You can adjust the allocation, but only within a 20% range – so the highest allocation to one category can be 60%, and the lowest can be 40%.

Features of Balanced Funds

Here are a few characteristics that can be used to assess investment choices.

Lower Risk

They carry a much lesser risk than funds primarily investing in equity mutual funds.

Distributed Risk Exposure

They have a lesser risk because the risk exposure is spread among liquidity and debt investments.

Adapts to Market Changes

These funds allow you to change their investment ratio in equity and debt based on the market movement.

Two Types of Balanced Funds

There are two main kinds of balanced funds: one that focuses more on equity, known as equity-oriented funds and the other, known as debt-oriented funds.

Potential for Higher Returns

Hybrid mutual funds are different from regular funds. They follow a fixed ratio of the investment ratio that goes into stocks and bonds. They do not allow you to go over the limits set for each type. This is why they can help generate massive wealth in high markets.

What are Balanced Advantage Funds?

Balanced advantage funds are also called dynamic asset allocation funds. BAFs have no restrictions on asset allocation. Thus, you can move the money between stocks and bonds as the market changes.

When the market is doing well and reaches its peak, these funds rescue the money in equity and shift the funds to debt. It helps protect the money you have made even if the market starts to go down.

These funds aim to create wealth by keeping your investment intact, even in the case of market downfall.

Features of Balanced Advantage Funds

Some features of the balanced advantage funds:

Require Actively Management

These funds are actively managed and have a diverse portfolio.

Adapts to Market Conditions

The fund manager decides how much money goes into debt and equity based on how the market is doing.

Allow to Maximise Returns

The investment strategy for these funds is decided beforehand, but they allow you to adjust these strategies, thus maximising your returns.

Minimised Losses

These funds help protect you from significant losses because you can change your plan if the market changes.

Balance for Better Returns

If one instrument in your investment isn't doing well, the other instruments can compensate for it.

Balanced Fund vs. Balanced Advantage fund

Before investing, you must understand the differences and similarities between them. They are as follows:

Similarities Between Balanced Fund And Balanced Advantage Fund

Some of the shared characteristics are observed in both types of funds:

Hybrid Nature

Both the funds invest in equity and debt, combining different types of investments. They both are hybrid funds.

Balancing Risk-Reward

Both of these funds aim to diversify the portfolio and create a balance between risk and reward by including growth-oriented investments and stable income assets (like fixed-income securities).

Risk Management

They both work to limit potential losses from the equity market by investing in non-market-linked bonds and debt, providing income and security.

Diversification

Generally, both funds spread their investments in stocks across different companies of different sizes to reduce the risk of having too much money in one type of stock.

Investment Horizon

Investing in both types of funds is usually recommended for a minimum of 3-5 years.

Differences Between Balanced Funds Vs. Balanced Advantage Funds

Besides the advantages, these funds also possess some disadvantages. They are as follows:

Feature	Balanced Funds	Balanced Advantage Funds
Investment Ratio	Fixed 60/40 rule (equity/debt).	No fixed rule; flexible based on market trends.
Rebalancing Asset Composition	Limited 20% change in allocation.	Greater flexibility in asset allocation.
Return on Investment	Requires a minimum 40% in equities.	Adaptable allocation for potential higher returns.
Risks in Both Funds	Market-related risks; limited flexibility.	Balanced risk exposure with flexibility to reduce equity.
Tax Differences	Treated like debt funds (below 65%).	Taxation varies; aiming for equity-like benefits.

Investment Ratio

Balanced funds have a set 60/40 allocation rule. These funds require you to invest 60% of your money in either equity or debt, and the other 40% goes into other money market instruments. However, balanced advantage funds have no such rule, and SEBI has more relaxed rules. You can decide how much of your money goes into equity and debt based on market movement.

Rebalancing Asset Composition

Balanced funds are limited in how much you can modify the ratio of assets you invest in. There is a maximum change of 20%. It implies that you can transfer your funds from one instrument to another but cannot go below 40% or rise above 60%. Balanced advantage funds, however, have more discretion. You can allocate your funds as you see fit between equity and debt. The amount they can shift is not constrained in any way.

Return on Investment

Balanced funds need more flexibility. You must keep at least 40% in equities whether the market is favourable. This flexibility improves balanced advantage funds, allowing you to adapt to changing market situations. In contrast, Balanced advantage funds offer the potential for higher returns if the market is favourable while providing stability and regular income in challenging times. This is because of their flexibility, which allows you to adjust their allocation between debt and equity based on market conditions.

Risks in Both Funds

These funds have some risks because investment is made in equities and debt. Equities have risks linked to how the overall market behaves, and if you do not spread your money across different types of companies, the risk may increase. However, balanced advantage funds have an advantage. When the market is not doing well, you can reduce your equity investment, which balanced funds cannot do.

Tax Differences

Regarding taxation, balanced funds are treated like debt funds because their investment ratio is below 65%, which is the threshold for getting the same tax treatment as stock-focused funds.

Balanced advantage funds can be taxed like either equity or debt, depending on the type of allocation. Usually, many of these funds try to keep at least 65% in stocks to get the same tax benefits as stock funds.

They often split their money between equity and arbitrage or unhedged equities. It helps them make money from price differences between the cash and futures markets, and it's not affected much by market movement.

Which one should you choose?

When choosing between balanced and balanced advantage funds, aligning your decision with your risk tolerance and investment goals is recommended.

Feature	Balanced Funds	Balanced Advantage Funds
Risk and Returns	Gradual, stable growth; less affected by market swings.	More risk for higher returns; adaptable to market changes.
Expense Ratio	Lower due to less active asset allocation.	Higher due to active asset allocation.
Beginner-Friendly	Recommended for beginners; less need for constant monitoring.	Broadly suitable; excels in soaring markets with strategic adjustments.
Fund Objectives	Prioritizes stability and long-term growth.	Aims to outperform by adapting to market movements.

Risk and Returns

Balanced funds suit investors aiming for gradual, long-term wealth growth with less concern about rapid market fluctuations. On the other hand, balanced advantage funds are better for those comfortable with a bit more risk, seeking higher returns when markets are strong. Remember that these funds may not consistently provide the same returns as they adapt to varying market situations.

Expense Ratio

Generally, balanced funds have lower expense ratios than balanced advantage funds because the latter requires more active asset allocation.

Beginner-Friendly

Financial advisers often recommend balanced funds, especially for beginners, as they do not require constant market watch. These funds offer flexible asset allocation, which reduces the need for precise market predictions. Balanced advantage funds can be suitable for a broad range of investors. They perform well in soaring markets, protecting market volatility. They can generate more returns in stable markets through strategic adjustments.

Fund Objectives

Balanced funds prioritise stability and long-term growth over short-term market swings. Balanced advantage funds strive to outperform unpredictable market movements by adjusting their strategy to achieve favourable results.

Conclusion

You will get a better understanding of both balanced funds and balanced advantage funds. Balanced funds suit those who do not like too much risk and want their money to grow slowly but safely. On the other hand, balanced advantage funds are more like a flexible strategy, allowing you to change your investments as the market moves.

To pick the right one for you, think about how much risk you are comfortable with, your financial goals, and how involved you want to be. Both funds have pros and cons, so the choice depends on what suits you best.