What are Balanced Advantage Funds? What are the advantages of BAFs? Should you invest in BAFs?

This article explains what a BAF is, quantifies its rising popularity in rupee terms, and lists the factors that lend a BAF its advantages.

Have you invested in BAFs

If you are reading up on investments and the equity markets, you may have read of the rising popularity of BAF among Indian investors. So what are BAFs, and why are they so popular?

To understand BAF or the Balanced Advantage Fund, think cricket; just as an all-rounder bowls and bats both, the BAF is a mutual fund that invests in both equities and debt instruments. A BAF’s fund manager dynamically manages funds invested between the two, the asset allocation strategy depending on the rule-based model of a particular fund house.

Such dynamic fund management allows BAFs to cash in when the market is up and soften the blow when it is down. As such, BAFs can prove ideal for those who don’t mind taking risks even as they seek fixed returns.

Also Read: Important Things To Consider When Investing In A Mutual Fund

How popular are Balance Advantage Funds?

Do bear in mind that BAFs can take a hit when markets are down. The HDFC Balanced Advantage Fund, for instance, fell 8.3% when the equities market slid in the October-December period last year. Yet, market data shows that among all equity and hybrid funds, assets under management (AUM) of BAFs registered the highest growth last year, mopping up some Rs 71,587 crore.

In August 2021, when SBI Mutual Fund launched its BAF, it mobilised around Rs 14,500 crore, making it the third-largest fund in the category - even before starting operations. This amount was also the highest-ever mobilisation by a New Fund Offer (NFO) among equity-oriented mutual funds.

Advantages of Balance Advantage Funds

Despite the risks involved, BAF investments have certain inbuilt advantages that make them attractive to investors.

Let us see what these are:

  • Daily Valuation: Allotments of pure balanced funds are restricted by set limits of 65%-70% for equity and a 35:30 ratio for debt. On the other hand, BAFs can dynamically change the asset allocation as per daily equity valuations and can invest as high as 80% or go as low as 30% (in equity). In other words, they can raise the exposure to both equities and debt as per the market conditions. This enables better long-term returns.

Also Read: Why Asset Allocation Should Be The Core Of Every Investment Portfolio?

  • Stable Returns: Despite the example of HDFC’s BAF cited earlier, what the dynamic allocation does is cushion the impact of market declines. As a result, the returns generated by BAFs are far more stable than those of a pure equity fund. This boosts wealth creation.
  • Handles Volatility: BAFs do more than just cushion the impact of declining markets; they are designed to create wealth by using volatility as a tool by buying stocks at a low valuation and selling them at higher levels.

Also Read: Different Types Of Funds Available Under Mutual Funds

  • Valuation Strategy: BAFs take the price-to-book (P/B) approach for the valuation of companies that are to constitute the portfolio of a mutual fund scheme. This model, according to financial analysts, is safer for this purpose than the P/E (price-to-earnings) model usually followed to value stocks for investments.
  • Risk Dissipation: BAF portfolios are generally spread across large-cap and mid-cap stocks. This means the stocks of large and established companies ensure stability, while those of mid-sized companies promise growth. Such a diversified portfolio pre-empts the concentration of risks.

Disclaimer: This article is intended for general information purposes only and should not be construed as investment or legal advice. You should separately obtain independent advice when making decisions in these areas.


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