Hybrid Funds and Balanced Advantage Funds

What Are Hybrid Funds and Balanced Advantage Funds?

Hybrid funds and balanced advantage funds are two similar yet distinct fund types with varying properties. Both these funds have their own set of pros and cons, making it easier for you to prefer one over the other.

Hybrid funds are also known as balanced funds. The fund gives the option of diversifying your portfolio, which enables you to benefit from both equity and debt funds. A hybrid fund consists of a bond component and a stock component. The bond component represents debt, and the stock component represents equity. The main aim of a balanced fund is to help the investor gain profitable returns with a low-risk component. It allows you to invest a portion of your assets in equity funds that ensure high returns.

You can invest the remaining portion in debt funds that ensure the safety of your investments by mitigating the risks posed by equity funds. Balanced advantage funds (BAFs) are dynamic asset allocation mutual funds that do not stick to a fixed ratio of equity and debt. The main difference is in the aspect of their asset allocation strategy; hybrid funds have a more fixed or range-bound allocation compared to balanced advantage funds, which practice a dynamic and actively managed asset allocation strategy on the basis of market conditions.

Features of Balanced Funds

Let us have a look at the features of balanced funds:

• These funds carry a lot less risk compared to funds that deal only with equity mutual funds.

• Risk is minimized because the risk exposure is distributed among debt and equity assets.

• Balanced or hybrid funds allow the fund manager to change the fund portfolio according to the fluctuations in the financial market.

• There are two basic types of balanced or hybrid funds: Equity-Oriented Balanced Funds and Debt-Oriented Balanced Funds.

• Hybrid mutual funds are defined by their strict adherence to a predetermined mix of equity and debt assets, which is designed to balance growth potential with risk reduction.

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Who Should Invest In Balanced or Hybrid Funds?

Balanced or hybrid funds are meant for the following types of investors: 

• People who are looking for medium capital appreciation.

• People who do not have a high-risk appetite are the most common investors for balanced funds, such as retired individuals. These investments help them to maintain a balance between their risk and returns. 

• People who prefer investing in a mixed portfolio of funds.

What Are Balanced Advantage Funds?

Balanced advantage funds are mutual fund schemes that are known to switch between equity and debt securities as per market conditions. These funds work around the advantage of either debt securities or equity, based on the current market scenario. Unlike balanced funds, balanced advantage funds do not have allocation limits and move their allocations between debt and equity periodically.

These funds monitor the market with the help of their internal valuation techniques and make sure which way to go with their fund allocation. For example, in case the valuation shows that debt markets are overvalued, the fund increases its equity investment to take full advantage of the situation and vice versa.

Features of Balanced Advantage Funds

Let us have a look at the balanced advantage funds:

• Balanced advantage funds are actively managed funds that have a diversified portfolio.

• The allocation of funds to maintain equity and debt levels is based on the market conditions prevailing at that time.

• The asset allocation strategy is decided upon beforehand but adjustments are made to maximize returns.

• With the help of balanced advantage funds, you can be sure to bear minimized losses as the fund would improvise its strategy if the market changes.

• In case there is a certain underperforming asset in your portfolio, the other performing asset classes can make up its returns.

Who Should Invest in Balanced Advantage Funds?

Balanced advantage funds are suitable for the following types of investors:

• Balanced Advantage Funds (BAFs) are ideal for long-term investors seeking higher equity returns with protection against market falls, offering an alternative to traditional debt funds.

• People who do not have adequate knowledge about asset allocation and want an expert to do this job must opt for balanced advantage funds. 

• Balanced advantage funds would be best for you if you are new to the mutual fund game and want long-term investment opportunities for wealth creation.

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Difference Between Hybrid and Balanced Advantage Funds

Both hybrid and balanced advantage funds have certain distinctions among them. The following table will help you understand the primary differences between the two mutual fund schemes so that you can easily make up your mind before investing.

Are Balanced Advantage Funds More Profitable?

Some of the reasons for balanced advantage funds being better than balanced funds are discussed below.

• Balanced advantage funds generate more growth as they take advantage of the market fluctuations.

• Even when the market is undervalued, balanced advantage funds increase their equity exposure and act as an equity fund.

• A balanced advantage fund can perform well even when the market is flat.

• With balanced advantage funds, there is no need to time market fluctuations as they can easily adapt to the ever-changing market scenarios.

In Conclusion

Both hybrid funds and balanced advantage funds offer equity-debt diversification. Hybrid Funds use a fixed equity mix for higher growth potential and volatility. Balanced advantage funds use an actively managed, shifting mix based on market conditions, aiming for risk-adjusted returns and downside protection. Crucially, both are usually taxed as equity funds. The investor's decision comes down to preferring high growth/risk versus consistency/lower volatility.