Low volatility, better value: Why balanced advantage funds are back on investors’ radar

Attractive valuations of large cap stocks and high yields from bond funds, are making several wealth managers bullish on balanced advantage funds, which look suitable to first time investors who want low volatility.

WHAT ARE BALANCED ADVANTAGE FUNDS (BAF)?
Balanced advantage funds (BAFs) are mutual fund schemes that invest in debt and equity. The percentage allocation to equity may vary between 30- 80% and is dynamically decided by each fund house largely based on various fundamental and technical parameters. Typically, when market valuations are high, allocation to debt may increase. When valuations become cheap, equities may attract higher allocation. The strategy helps investors in maintaining asset allocation, based on market valuations

HOW MANY INVESTORS ARE INVESTED IN THE BALANCED ADVANTAGE FUND CATEGORY?

There are 36 schemes in the balanced advantage fund space with 57.3 lakh folios that manage assets worth Rs 2.5 lakh crore as of April 30, 2026

WHERE DO BALANCED ADVANTAGE FUNDS ALLOCATE MONEY?
A: A big component of the equity portion is allocated to large cap stocks, with only a small component in mid or small cap stocks. The fixed income fund is allocated to a mix of high quality bonds and government securities, with most fund houses staying away from duration risk. The Nifty 50 is currently trading at a P/E of 19.9 compared to its 10 year average of 20.6, making valuations attractive while short term bond yields are around 6.5-7%, giving returns higher than inflation, Wealth managers believe both combined together, such a product offers moderate returns with low risk and volatility

WHAT ASSET ALLOCATION MODELS ARE USED BY BAFS?

Fund houses use inhouse models developed by the research team to decide the percentage allocation to equity and debt. Most fund houses use a pro cyclical mode which buys more equity when it sees cheaper valuations and vice versa. Fund managers can use a mix of fundamental factors such as price-earnings ratio, price-book ratio and technical parameters including daily moving average to arrive at equity allocation. Some fund houses also use a counter cyclical model which increases equity allocation in rising markets

WHO MAY CONSIDER BALANCED ADVANTAGE FUNDS?
First time investors typically who do not want higher volatility like equity and stable returns can consider these funds. Investors moving money from fixed deposits to mutual funds and looking to earn little more than fixed deposits with higher tax efficiency can also consider such funds.

HOW ARE THESE SCHEMES TAXED?
These funds are structured in such a way that they are taxed as equity funds for investors. Investors who sell units after holding for one year need to pay 12.5% long term capital gains tax. For a holding period of less than one year, short term capital gains tax of 20% comes into effect. When such a scheme lowers its equity exposure, it ensures that the equity plus arbitrage component of the scheme is at least 65% of the corpus, which helps it qualify for equity taxation.