Lower risk than equity funds, better returns than FDs

When investing in the stock market, there is always a concern that you never know when the market will go up and when it will fall down. The Balanced Advantage Fund (BAF) category helps safeguard against market uncertainty in mutual fund schemes. It gives better returns than debt funds and FDs, and carries lower risk compared to equity funds.

So what are BAFs and how do they work? 

First, understand how these funds work. Balanced Advantage Funds come under the hybrid fund category. The fund manager invests at least 65% of the scheme in equities and the remaining amount in debt. This scheme invests in low volatility, i.e. low-risk stocks. When the market is at high levels and expensive valuations, the fund manager reduces the equity portion to 30%. The remaining equity portion is hedged by investing in arbitrage. Through this process, the scheme remains an equity category.

Arbitrage means buying something cheaper from one place and selling it at a higher price elsewhere. For example, if the price of ABC stock in the cash market is Rs 100 and it seems this stock could reach Rs 120 in the futures market. In such a case, the fund manager will buy this stock at Rs 100 and sell it in the futures market at Rs 120, thus making a 20% profit.

How are the returns?

Balanced Advantage Funds have given great returns in the last five years. According to the data from Ace Mutual Fund as of May 20, 2024, the returns of the top 10 schemes in the last one year ranged between 18.89% to 39.93%, while the three-year returns were in the range of 10% to 24%. The five-year average return ranged between 10.93% to 19.55%. With lower risk, these returns are much better than bank FDs.

How about tax?

Tax on investment is also an important aspect. Balanced Advantage Funds come under the equity category. So the tax is levied on them like equity funds. If you redeem the investment within one year, the return will be taxed at 15%. If redeemed after one year, 10% long-term capital gains tax is applicable. However, gains up to Rs 1 lakh on total equity investment in a financial year are completely tax-free.

Now the question arises, should you invest in these funds? CFP Sachin Parekh says that Balanced Advantage Funds invest in low volatile stocks, bonds etc. Therefore, these schemes are likely to give better returns than FDs. People who want better returns with low risk can invest in these funds. These funds are more useful for retirees and pensioners. They can make a lump sum investment and opt for a Systematic Withdrawal Plan (SWP) to earn a regular income.

People who do not want to take big risks on investments and want better returns than FDs can invest in Balanced Advantage Funds. If you do not have in-depth knowledge about mutual funds, take help from a financial advisor.