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​Benefits of investing in a balanced advantage fund for retirement planning

A balanced advantage fund (BAF) is a hybrid fund that dynamically manages the asset allocations across debt and equity instruments depending on equity market valuation. This fund follows the “purchase less and sell high” approach in equity markets to register long-term wealth. This is a prudent investment solution if you are looking to diversify your investments. Following the model-based approach allows the funds to rebalance investments between fixed income and equity instruments in a tax-efficient way without the need for you to keep constant track of it.

Generally, other categories of mutual funds, say equity funds, make changes to their asset allocation as per the changing economic scenario. However, unlike conventional hybrid mutual funds, which hold debt and equity allocations within a particular and defined limit, a balanced advantage fund has zero such constraints and modifies its allocations flexibly. Such features make them an ideal choice for retirement corpus creation. Discussed here are some reasons for you to consider a balanced advantage fund to attain your post-retirement goal –

  • Market corrections have no impact on your returns

Fund managers enhance your equity allocation if they view any market opportunity. This provides you with higher returns on your portfolio when the market recoups. Once the price of the stock becomes high, your fund manager might move some investment capital to debt instruments. Such dynamic management among asset classes prevents your investment from registering losses when either of the asset classes underperforms.

  • Has the potential to generate stable returns

Balanced Advantage Funds hold both debt and equity and shift dynamically between them depending on the model-based approach. Exposure to debt allows you to prevent downside risk during volatile market conditions and earn stable returns.

  • Eliminate the requirement to time the market

BAFs allow you to overcome any emotional biases when facing equity markets. The dynamic allocation approach allows this fund to invest in the correct asset class at the correct time. This protects your investment from market volatility, helps you earn returns and removes the need for timing your investment.

  • Tax benefit

Based on the asset allocation, BAFs may be taxed as equity or debt funds. However, most funds maintain high equity exposure to provide you with the benefit of equity tax treatment. Note that long-term capital gains on equity concentrated BAFs of up to Rs 1 lakh are tax-free while gains of over Rs 1 lakh are taxed at 10 per cent. Short-term capital gains of ​equity concentrated BAFs are taxed at 15 per cent.

Ending note

If you are a risk-averse investor and find it difficult to time your investments as per market movement to generate higher returns for your retirement, then you may opt for the BAF option. This is because this investment option removes the need to time your investment. When the equity markets fall, BAFs expand their exposure to equities, whichdeliver higher investment returns when the market recoups. During the rising market scenario, BAFs tend to expand their debt exposure to provide capital preservation and stable returns. So, it is the combination of capital preservation, potential capital appreciation and volatility control that makes it a prudent investment option to generate your retirement corpus over the long term.

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