Skip to content

Mutual Funds

Balanced and unbalanced advantage funds – Similarities and differences

Written by - Marisha Bhatt

November 2, 2022 5 minutes

In the face of extreme market volatility, a majority of the risk-averse investor class of India is seeking relatively less risky investment options that can provide them with better returns at the same time. In such scenarios, investment in hybrid funds is ideal as it gives the benefit of equity as well as debt instruments. Among hybrid funds, investors can find balanced funds as well as balanced advantage funds. Though they sound similar there are subtle differences between the two. Given below is a brief discussion relating to the meaning and the differences between balanced funds and balanced advantage funds.

What are balanced funds?

Let us begin with the balanced funds. These funds belong to the hybrid fund category. Under these funds, the investment in equity and debt instruments is more or less equal or balanced i.e., a minimum of 40% and a maximum of 60% in either class of investments. This helps the investors enjoy the relative stability of the bond market or the debt instruments as well as earn returns that can beat inflation through equity exposure. The fund managers do not have too much flexibility between the equity and debt exposure but have to navigate between the 20% band that is available as per the guidelines of the fund. 

Read more: How to pick the right hybrid fund?

What are balanced advantage funds?

Balanced advantage funds also belong to the hybrid fund category. These funds can be categorized as dynamic funds as the fund managers can shift between the equity and debt exposure depending on the prevailing market conditions. These funds can, therefore, also be called dynamic asset allocation funds. The fund manager strategically modifies the fund allocation between equities, debt, and arbitrage based on their in-house strategies and investment model. The expertise of the fund manager and their understanding of the market is crucial to achieving the objective of such funds and generating returns or wealth creation for the investors. 

What are the similarities between these funds? 

While there are a few basic differences between balanced funds and balanced advantage funds, there are a few similarities as well. Some of the key similarities between the two are,

  1. Both these funds belong to the hybrid fund category.
  2. The investment horizon of both these funds is usually between 3 to 5 years.
  3. Both these funds provide balanced returns by managing the risk exposure of the fund and depend heavily on the fund managers for strategic decisions and allocation. 
  4. Balanced funds and balanced advantage funds both invest in a diverse class of investments across all the market capitalizations. 

What are the key differences between balanced funds and balanced advantage funds? 

Some of the prime differences between the balanced funds and balanced advantage funds are highlighted below. 

CategoryBalanced FundsBalanced Advantage Funds
Asset AllocationThe asset allocation of balanced funds is 40% to 60% in equity and equity-related instruments,  the balance in debt and debt-related instruments. The asset allocation in these funds is not fixed and can be allocated to equities, debt, and arbitrage as per the prevailing market conditions. 
Flexibility to switch between assetsThere is limited flexibility to switch between the equity and debt instruments in the balanced fund categoryThere is extreme flexibility for the fund managers to shift between the asset classes based on the in-house investment strategies and fund manager’s expertise. 
Risk The risk in balanced funds is lower as compared to balanced advantage funds as the flexibility of assets allocation is lower.  Balanced advantage funds are quite riskier as the exposure to equity and equity-related instruments can be higher in an upward market trend.
ReturnsThe returns from balanced funds are more or less stable as the aim of the fund is to achieve stability and thereby long-term wealth creation for investorsThe returns from balanced advantage funds are quite dynamic and quite fluctuating depending on the asset allocation and prevailing market volatility. 
TaxationBalanced funds are usually taxed as debt funds as the maximum equity exposure of the funds at any point is up to 60% which is lower than the required 65% allocation to qualify as equity funds. Balanced advantage funds can be taxed as equity funds or debt funds depending on the asset allocation of the fund at the time of redemption. 
ExpensesThe expense ratio of the balanced funds is usually lower as compared to balanced advantage fundsThe expense ratio of the balanced advantage funds is on the higher side when compared to balanced funds

Conclusion 

Balanced funds and balanced advantage funds both provide excellent investment opportunities for investors who want to invest in a diverse class of assets at minimal costs. Balanced funds can be a better investment option for risk-averse investors or beginners in the stock markets, whereas, investment in balanced advantage funds is ideal for risk takers and investors aiming to profit from short-term volatility. 

FAQs

What is the upper limit of rebalancing the fund corpus in balanced advantage funds?

There is no upper limit for rebalancing the fund corpus in either of the asset class under balanced advantage funds.

How are balanced funds taxed?

Balanced funds are taxed in line with debt funds.

Who are the target investors for balanced funds?

The target investors for balanced funds are investors with a lower risk profile and a long-term investment horizon.

How do balanced advantage funds eliminate the need to time the market?

Balanced advantage funds have the flexibility to alter the asset allocation based on the market conditions to take maximum advantage of the market volatility to provide risk-adjusted returns. Therefore, the investors need not worry about readjusting their portfolio for the same. At the same time, balanced advantage funds can also act like balanced funds in an extremely volatile market to provide more stable returns.

Download one of India's best wealth management apps

Join more than one million investors and take control of your wealth

Download app