Hybrid Funds and Balanced Advantage Funds

It is always advised not to pool all your money into single security or asset class when it comes to investments. Financial experts suggest that a diversified portfolio ensures more chances of profitable returns than linear portfolios. It also makes risk-bearing an easier task.

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

What Are Balanced Funds?

Balanced funds are also known as hybrid funds. This type of fund gives the option of diversifying your portfolio, which enables you to benefit from both equity and debt funds. These mutual fund types consist of a bond component along with 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. Hybrid funds are suitable for people who want the exposure of investing in both debt and equity. 

Features of Balanced Funds

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

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

  • Risk is minimized because the risk exposure is distributed within 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 different from traditional funds. This is because they stick to the rules of asset allocation determined at the onset of the fund. They never exceed the predetermined exposure rules of the market. Due to this reason, balanced or hybrid funds generate high returns at the time of bullish market conditions. 

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:

  • If you want to invest money for a long time, balanced advantage funds are the ideal choice for you. This fund provides an opportunity for investors to deal with an aggressive alternative to traditional debt funds. These funds are perfect for you if you want to invest in equity to earn higher returns while still being protected in case the market falls.

  • 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.

Difference Between Hybrid and Balanced Advantage Funds

Both hybrid and balanced advantage funds have certain distinctions amongst 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.

Basis

Balanced Funds

Balanced Advantage Funds

Goal 

The goal for balanced funds is to provide long-term growth and stability to the investors.

The goal for balanced advantage funds is to provide growth that has been adjusted for risk.

Strategy 

The strategy for these funds is to invest in both equity and debt as per the predetermined set of allocation rules.

These funds strategize their asset allocation according to the market fluctuations.

Expense Ratio

The expense ratio is low in the case of balanced funds.

The expense ratio is comparatively higher than that with balanced funds.

Fund Allocation

Balanced funds allocate 40% to 60% of its assets in equity, and the rest is allocated in the debt market.

Balanced advantage funds allocate 30% to 80% of its assets in equity, and the rest is allocated in the debt market.

Returns 

Balanced funds have a higher return rate as they aim at long-term growth.

Balanced advantage funds may generate fewer returns on a long-term basis as they provide gains adjusted for risk.

Benefits 

Balanced funds provide long-term benefits for investors.

Balanced advantage funds provide arbitrage benefits for investors.

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

The financial objective and affordability are major deciding factors in choosing a mutual fund type. Both hybrid and balanced advantage funds have features that are important for the investor to know beforehand. 

You have to decide whether to invest in a plain debt fund or to invest in the combination of a debt and equity fund. Whatever may be the choice, make sure to put your money into a scheme that supports your investment goals.

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