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Time of India
3 days ago
- Business
- Time of India
Balanced advantage vs. Multi Asset Allocation Mutual Funds: Which should investors choose?
Balanced Advantage / Dynamic Asset Allocation Funds Live Events Multi Asset Allocation Funds Key differences Which fund type should one choose? Way forward for these categories In the diverse universe of mutual funds , understanding the distinction between various hybrid categories is crucial to making informed decisions. Two popular choices for investors seeking a balanced risk-return approach are Balanced Advantage Funds (BAFs), also known as Dynamic Asset Allocation Funds (DAAFs), and Multi Asset Allocation Funds While both aim to manage market volatility and deliver consistent returns, they differ significantly in structure, asset composition, and investment philosophy. Here's a breakdown of how they work and how investors can choose between advantage funds or dynamic asset allocation funds are designed to dynamically shift between equity and debt based on changing market conditions. Fund managers use internal models that assess valuation metrics, momentum, and macroeconomic indicators to decide how much exposure should be allocated to equity or debt at any given time. The equity allocation in these funds can vary widely, typically ranging from around 30% to over 80%, depending on the fund house's model. The debt portion acts as a buffer, helping reduce volatility during market downturns.A unique advantage of BAFs is that many of them maintain an average equity exposure above 65%, often through arbitrage positions. This allows them to qualify for equity taxation, which is more favourable than debt taxation over the long term. The goal of these funds is to provide stable, equity-like returns while limiting downside risks through timely asset rebalancing. Investors who want market participation without full equity volatility often find BAFs an attractive core asset allocation funds, as per SEBI guidelines, are required to invest in at least three asset classes — usually equity, debt, and commodities like gold — with a minimum of 10% in each. This structure inherently provides broader diversification compared to BAFs, as the inclusion of non-correlated assets such as gold helps reduce overall portfolio funds typically maintain a mix where equity forms the core, supported by fixed income instruments and gold or other commodities. Unlike BAFs that dynamically change their equity-debt allocation based on models, Multi Asset Funds often rebalance periodically rather than tactically. The objective here is to deliver stable returns across different market cycles, relying on the varying performance of asset classes rather than frequent tactical shifts. For investors who believe in the long-term benefits of diversification across asset classes, multi asset funds offer a one-stop most fundamental difference lies in the asset mix. While BAFs primarily toggle between equity and debt based on valuation models, Multi Asset Allocation Funds include at least three asset classes and maintain a minimum allocation to are typically more dynamic, with frequent shifts between asset classes to respond to short-term market movements. In contrast, multi asset funds may follow a more stable rebalancing strategy, providing smoother returns but potentially lower agility during sharp market terms of taxation, most BAFs enjoy equity taxation because they maintain the required equity exposure through direct holdings or derivatives. Multi Asset Funds, however, may not always qualify for equity taxation depending on the actual breakdown of the portfolio, which could affect post-tax balanced advantage funds enjoy equity taxation which means investors who hold for more than a year pay 12.5% tax. In the case of multi-asset funds, some schemes that allocate more than 65% to equity enjoy equity taxation. However, there are some conservative schemes that have 35-65% allocated to equity, where investors who hold for more than 2 years pay tax at 12.5%, while those that sell before 2 years pay slab-based distinction is that while BAFs usually exclude commodities, Multi Asset Funds mandate exposure to gold or other non-equity, non-debt assets, offering better diversification in times of inflation or global Advantage or Dynamic Asset Allocation Funds are ideal for investors who want active equity participation but with an in-built cushion during market downturns. These funds are particularly useful for conservative investors looking for equity exposure without fully bearing the volatility of the stock market. They are also suitable for long-term investors who prefer tax-efficient options and want the fund manager to adjust allocations based on market the other hand, Multi Asset Allocation Funds are a good fit for investors who value broad diversification and want exposure to different asset classes like gold, which can act as a hedge during economic instability or inflation. These funds tend to be more conservative in their allocation and are appropriate for moderate-risk investors who believe in riding different market cycles through asset diversification rather than timing or tactical Balanced Advantage and Multi Asset Allocation Funds serve the purpose of managing portfolio risk, but through different mechanisms. While BAFs rely on dynamic shifts between equity and debt based on market signals, Multi Asset Funds take a more structured diversification route involving a broader set of asset choice should ultimately depend on your investment goals, risk tolerance, and belief in either tactical allocation or strategic diversification. In many cases, combining both types within a portfolio can create a well-rounded investment strategy suited for various market the investor has a medium- to long-term horizon, partial deployment in balanced advantage or multi-asset funds can serve as a middle ground, offering market participation with downside buffers,' Sagar Shinde, VP Research, Fisdom shared with sharing the way forward for multi asset allocation funds, Vishal Dhawan, CEO, Plan Ahead Wealth Advisors, a wealth management firm in Mumbai told ETMutualFunds that one can hold multi asset allocation funds in the portfolio especially in volatile markets as they can help preserve capital and deliver more stable returns over time compared to pure equity funds.'Gold, for instance, has emerged as one of the strongest-performing asset classes in recent years, especially during times of global uncertainty. Its presence in the portfolio can act as a natural hedge, offering protection when equities are under pressure. However, it is important for investors to understand the fund's asset allocation model and strategy as this will influence how the fund performs across different market cycles,' Dhawan adds.
Mint
25-05-2025
- Business
- Mint
Why balanced advantage funds are back in focus for moderate risk investors
Dynamic asset allocation funds (DAAFs), also known as balanced advantage funds, invest across equity and debt in a flexible, market-responsive manner. In theory, these funds increase equity exposure when valuations are low and shift towards debt when equity valuations appear stretched. This ability to dynamically balance risk and reward makes them particularly attractive to moderate-risk investors looking for inflation-beating, tax-efficient returns, without the need to time the market. Historical data reveals that dynamic asset allocation funds (DAAFs) have offered strong downside protection, relatively low volatility, and consistent returns, especially appealing for moderate-risk investors. Read this | Mastering the art of investing: Build a portfolio that lasts On a 5-year daily rolling CAGR basis since each fund's inception (as of 30 April 2025), none of the DAAFs delivered negative returns, even during major market downturns like the 2008 global financial crisis and the 2020 Covid crash. In absolute terms, during the 2020 Covid-led market crash, DAAFs declined by 12.7% to 33.9% (average: –22.4%), notably better than the Nifty 50 TRI, which fell by 38.3%. These figures underline the ability of well-managed DAAFs to cushion downside risk and deliver inflation-beating returns with lower volatility—particularly beneficial for moderate risk takers. Additionally, since they are taxed as equity funds, their post-tax returns are more efficient than many traditional alternatives. However, not all DAAFs are equally suitable for moderate investors. Some can exhibit considerable volatility depending on their strategy. Hence, selecting a fund that stays true to its label, dynamically adjusts allocations, and consistently balances equity and debt exposure is critical. Choosing the right strategy: Pro-cyclical vs counter-cyclical Dynamic asset allocation funds typically follow one of two approaches. Pro-cyclical strategies take aggressive equity positions when markets are rising—essentially buying high with the aim of selling higher. Counter-cyclical strategies, on the other hand, are more conservative and valuation-conscious, increasing equity exposure when markets are falling, and thus following a buy-low-sell-high philosophy. Read this | Diversification isn't about how many stocks or funds you own—it's about which ones Both approaches have proven effective in different market cycles, and a combination of the two has historically offered a good mix of inflation-beating returns, lower volatility, and more consistent outcomes. However, this doesn't mean investors must own both. Moderate risk takers may find counter-cyclical funds more suitable, given their focus on downside protection. Aggressive investors, seeking to maximise upside in bull markets, might prefer pro-cyclical funds. Those who fall somewhere in between could consider holding a mix of both. Given the inherent market exposure in these funds, investors should ideally have a three- to five-year investment horizon and treat DAAFs as part of their equity portfolio. They are not substitutes for pure debt instruments. That said, the presence of debt and arbitrage components does lend them a degree of stability, making them especially attractive for those using systematic withdrawal plans (SWPs). A key advantage is that investors don't need to time their entries, especially in counter-cyclical funds where the strategy itself is designed to respond to valuation shifts. Why DAAFs are well-placed in the current market Today's market environment makes a strong case for DAAFs, particularly for moderate risk takers seeking inflation-beating, tax-efficient returns. Equity markets remain volatile and are currently in a corrective phase, which is beneficial for both long-term equity investors and arbitrage strategies. Large-cap valuations appear reasonable, especially when compared to the stretched valuations of mid- and small-cap stocks. Read this | Mastering Fixed Income Trinity: Balancing income, duration, and liquidity for smarter investments Meanwhile, on the fixed income side, although policy rates have come down, AAA bond yields remain elevated at around 7%. More rate cuts are expected through 2025 and 2026, which could push bond prices higher, adding to debt portfolio returns. DAAFs, as a category, appear well-positioned to tap into this dual opportunity. The average fund has a 55% allocation to equities—largely tilted towards large-cap stocks—and a 45% allocation to debt and arbitrage. The average yield-to-maturity of the debt component stands at about 7%, with maturities around 4.8 years. Also read | Can multi-asset funds balance risk and returns? Together, this asset mix offers a compelling risk-reward balance, giving investors a shot at both capital appreciation and income stability. While DAAFs aren't a complete replacement for traditional debt products—especially for highly risk-averse investors—they are becoming increasingly relevant in a falling interest rate environment, where beating inflation after taxes will likely require hybrid strategies. Rushabh Desai is founder of Rupee With Rushabh Investment Services. Views expressed are personal.
