Difference between balanced and balanced advantage fund

Categories of mutual funds under new categorization guidelines of SEBI

With SEBI’s new guidelines on mutual funds categorization, scheme selection has become easy for the investors. Earlier mutual funds were having many schemes under same category making it difficult to select a scheme for investment.

Under new categorization, mutual funds can be classified into 5 categories – Equity, Debt, Hybrid, Solution orientedslide 1 1024x1024 Difference between balanced and balanced advantage fund and Others. Equity funds and Debt funds invests in equity and debt market as the names suggest, whereas, Hybrid funds has allocation to equity and debt market instruments. Hybrid funds can be further classified into “aggressive, conservative and balanced hybrid funds based on their exposure to equities. Further a new category named “Balanced Advantage Fund” is introduced. Solution oriented funds are specific purpose funds such as retirement funds, children’s fund etc. And index funds, ETF falls under “Other” category.

Conservative hybrid funds will have 10-25% exposure to equities, aggressive hybrid funds will have 65-80% exposure to equities and balanced hybrid funds will have 40-60% exposure to equities. Whereas, balanced advantage funds also called dynamic equity asset allocation funds will have 30-80% exposure to equities.

Difference between balanced funds and balanced advantage funds

Balanced Funds

Balanced Advantage Fund

Objective

Providing long term growth and stability

Providing risk adjusted growth

Strategy

These funds invest in equity & bonds in line with pre-determined objective

These funds change their allocation based on the market fluctuation. They switch their exposure to bond market when equity market valuation is high and vice versa. These funds take advantage of arbitrage opportunities in equity derivatives segment.

Allocation of funds

40-60% in equities & rest in debt market

30-80% in equities & rest in debt market

Expenses

Generally, expense ratio will be low.

Generally, expense ratio will be high as these funds are more active.

Benefits for investors

Offers long-term growth, negating short-term volatility risks.

Offers investors the benefits of arbitrage tactics using short-term volatility

Performance

Returns will be higher as these funds focus on long-term growth.

Returns on long-term basis may be less as their objective is to provide downside protection and risk adjusted return.

Systematic Investment Plan, Growth and Dividend options

Available

Available

Post categorization, the clarity in mutual funds category will help investors in deciding the right funds according to their investment objective and risk bearing capacity. However, they should be diligent in deciding the fund to invest after comparing the similar funds from other fund houses in terms of expense ratio and other ratios such as Sharpe ratio and Treynor ratios. Also they should study the fund and the fund manager’s track record before investing.

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