Mutual funds offer different varieties for investors to fulfil their diverse goals and suit a spectrum of risk appetites. For instance, if you are looking for a conservative option, financial experts may suggest choosing from an array of debt funds available.
Balanced advantage funds are one of the popular choices here. They give you a diversified portfolio by investing in multiple asset classes. On the contrary, there are equity and index funds that focus solely on one asset class, that is equities.
But what are the differences between them and what should be your choice while investing in them? Read on to find out.
What are balanced advantage funds?
Balanced advantage funds, often referred to as dynamic asset allocation funds, are open-ended funds that dynamically shift their assets between equity and debt in accordance with the standards established by SEBI. These funds have the leeway to dynamically change investment portfolio between equity and debt based on the current market situation and outlook. This contrasts with other hybrid fund categories, such as aggressive hybrid funds and conservative hybrid funds, among others, which adhere to a static asset allocation model. This can cut losses during strong market corrections and allow investors to profit from the growth potential of stocks during periods in which valuations are favorable.
It is essential to remember that most balanced advantage funds invest at least 65 percent of their assets into equity so that they may take advantage of the advantageous tax treatment and create better profits. The remaining funds are put into debt securities and cash investments to ensure financial security even in the face of volatile market conditions. Many funds in this category also engage in hedging activities by investing in arbitrage and derivatives.
There is a possibility that balanced advantage funds could underperform the market during periods of bullish sentiment; nevertheless, they will provide stronger downside protection during periods of bearish sentiment, resulting in improved risk-adjusted returns.
What are equity funds and index funds?
Equity funds are investment vehicles that invest in stocks as their primary holdings. They can either be based on a particular market capitalization or industry sector or spread their investments across many different market capitalizations and industry sectors. Equity funds are actively managed, which means that the fund manager attempts to outperform the overall market by picking equities to buy or sell based on their research and analysis. This is being done to maximize the fund’s return on investment. Equity funds are more susceptible to price swings than index funds because they are actively traded and therefore more responsive to market conditions.
At the same time, an index fund is an equity fund that invests in different indices, such as the Nifty 50 or Sensex. By doing so, index funds have purely equity-based portfolios.
How to choose?
Choosing between index funds, equity funds, and balanced advantage funds depends on your investment objectives and risk tolerance. Index funds are passively managed and seek to replicate the performance of a specific market index, while equity funds are actively managed and try to outperform the market. Balanced advantage funds are a hybrid option that invest in both debt and equity securities and can adjust their asset allocation based on market conditions. It is important to consider your investment objectives, risk tolerance, and the fees of different funds when deciding which type of fund is right for you.
In conclusion, it is important to consider your investment objectives and risk tolerance when deciding between index funds, equity funds, and balanced advantage funds. It is also important to consider the fees of different funds and the level of diversification they offer. It is always a clever idea to consult with a financial advisor or investment professional before making any investment decisions, as they can help you understand your options and determine which type of fund is the most suitable for your specific financial situation and investment goals.