Balanced Funds and Balanced Advantage Funds are hybrid funds. This category of funds offer exposure to both equity and debt segments. They balance risk and reward and offer diversification in a single scheme. A strategic mix of debt with equity components make these funds less vulnerable to market volatility. The equity component of the fund can generate good returns which helps with capital appreciation, while the debt component protects the portfolio from market volatility.

Balanced Funds

After the SEBI recategorization in October 2017, Balanced Funds were renamed as Aggressive Hybrid Funds. They are mandated to have at least 65% of equity exposure in the portfolio at any point in time. The fund manager may go up to 75% based on the valuation. Since the fund invests at least 65% in equities, the investors in this fund can avail benefits under the equity taxation laws.

Balanced Advantage Funds

Balanced Advantage Funds are a new category introduced by SEBI at the time of recategorization. The Balanced Advantage Funds falls under the Dynamic Asset Allocation category. These funds combine equities, debt and arbitrage in one portfolio.

As the name suggests, these schemes dynamically manage the equity and debt part of the corpus based on the market conditions. The fund manager decides the equity exposure based on the market valuations. When the market is overvalued, the fund will reduce the equity exposure and when the market is undervalued, the equity exposure will increase. Whenever the fund’s allocation to equities goes below 65%, the balance allocation is made up by derivatives. So, if in any market condition the fund’s equity allocation declines to 30%, the balance 35% (you need to have 65% allocation to equities to qualify for equity-like tax treatment) is invested in derivatives.

Investment Strategy and Suitability of Balanced Funds

• Balanced Funds combine equity and debt in one portfolio
• They are expected to outperform the benchmark and protect the downside when the stock market declines
• The fund may be treated as an equity fund for taxation purpose

Investment Strategy and Suitability of Balanced Advantage Funds

• Balanced Advantage Fund combines stocks, debt and derivatives in one portfolio.
• They are considered less risky as compared to plain vanilla balanced funds
• They may be able to generate returns in every market scenario – Rising, Falling and Flat
• The fund can adjust equity exposure on the overall market valuations
• When the equity valuation goes up, the fund may reduce equity exposure but may increase the derivative allocation to maintain 65% in equity
• The fund may be treated as an equity fund for taxation purpose

Aggressive Hybrid Funds (Balanced Funds) and Balanced Advantage Funds have the potential to generate returns over a period of time with low volatility. The difference is that, the former has aggressive equity exposure, but the latter may have lower equity exposure and invest in derivatives. If you want to earn returns from equities and want to stay protected from market volatility, this could be the fund for you. Consult your financial advisor and invest based on your financial goals and risk profile.