What makes Balanced Advantage Funds a superior choice for investors?

A balanced advantage fund (BAF) scores over do-it-yourself investments in many ways for most individuals. While tax impact and trading costs, when trying to rebalance manually, remain high, auto-adjust equity-debt allocations, based on valuation or momentum models, keep equity exposure at 30-80%.

WHAT ARE BALANCED ADVANTAGE FUNDS (BAF)?

Balanced advantage funds (BAFs) are mutual fund schemes that invest in a mix of two asset classes, namely debt and equity. The percentage allocation to equity is dynamic and is based on models built by the fund house’s research team. Typically, when market valuations are high, the fund manager may tilt the allocation more towards debt by selling equity and and when they turn cheap allocate more to equity. Such a strategy helps investors maintain asset allocation.

HOW MANY INVESTORS HAVE PUT MONEY IN THE BALANCED ADVANTAGE FUND CATEGORY?
There are 35 schemes in the balanced advantage fund space with 5,250,000 folios that manage assets worth `2.93 lakh crore as of April 30, 2025.

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 and technical factors like priceto-earnings ratio, price-to-book ratio and trend indicators like daily moving average to arrive at equity allocation and build their model. Some fund houses also use a counter-cyclical model which increases equity allocation in rising markets.

WHO SHOULD INVEST IN BALANCED ADVANTAGE FUNDS?
Many investors are moving money from fixed deposits to mutual funds and are looking to earn a little more than fixed deposits. Such investors could consider an allocation to balanced advantage funds. This would give them a better experience instead of diversified equity funds where volatility could be higher

HOW ARE BALANCED ADVANTAGE FUNDS TAXED?
These funds are structured in such a way that they are taxed as equity funds for investors. This means investors will need to pay 12.5% long-term capital gains tax if they sell their units after holding for one year. 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.