This fund is called the 'all-rounder' of Mutual Funds; it saves losses in falling markets and gives huge profits in rising markets!

Balanced Advantage Fund (BAF) is a smart mutual fund that protects investors from the risk of market fluctuations to a great extent. It works by selling shares in expensive markets and buying shares in cheap markets under its dynamic asset allocation strategy. Its main advantage is to reduce losses in falling markets and make profits in rising markets.

Investing in the stock market means a cocktail of Risk + Adventure. When the market goes up, everyone is happy, but as soon as the market starts falling, the heartbeat of investors increases. Many investors hesitate to invest money in the market for fear that their hard-earned money may go down the drain. But is there any way that protects you from the shocks of falling markets and also gives you the benefit of rising markets?

Yes, there is such a special category in the world of mutual funds, whose name is Balanced Advantage Fund (BAF). These are also called Dynamic Asset Allocation Fund. Due to their special way of working, these funds are very popular among those investors who want equity returns but do not want to take much risk.

What is this Balanced Advantage Fund?

In simple language, Balanced Advantage Fund is a type of hybrid mutual fund. Hybrid means that the money is invested not in one place but in two different places - equity (stock market) and debt (safe places like government bonds, company debentures).

But this is not like any normal hybrid fund. Its biggest feature is its 'smart brain'. This fund automatically decides when to invest more money in the stock market and when to withdraw money from there and invest it in safe debt.

How does this 'smart' fund work?

The way these funds work makes them special. Every fund house uses a mathematical model that measures the valuation of the market. Valuation means whether the market is expensive or cheap.

When the market is expensive

When the stock market has risen a lot and things start to look expensive (i.e. valuation is high), then the fund manager smartly reduces his investment in shares. He takes out the profit from there and invests that money in safe debt instruments. This locks your profit and reduces the risk of market fall.

When the market is cheap

On the contrary, when there is a big fall in the market due to some reason and good shares start becoming available at cheap prices (i.e. valuation is low), then the fund manager increases his investment in shares by taking money out of debt. The advantage of this is that you get more units at a lower price, which gives a huge profit when the market rises back.

Understand with an example

Suppose a BAF has a rule that when the market's P/E (price-to-earnings) ratio goes above 22, then it will reduce the investment in equity to 30-40% and when the P/E comes below 18, it will increase the investment to 70-80%. Due to this automatic system, you do not have to worry about timing the market, the fund manager does this work for you.

Big benefits of investing in Balanced Advantage Fund

Downside Protection

This is its biggest advantage. When the market crashes, these funds do not fall as much as a pure equity fund due to less investment in equities. This limits your losses.

Upside Participation

Although it protects in a falling market, it does not mean that it does not take advantage of a rising market. Since a large part of it is also invested in equity, it earns you good returns even when the market is up.

Automatic Profit Booking

You do not need to think that "the market has risen a lot, should I sell it now?". This fund automatically secures your money by booking profit in expensive markets.

Best for new investors

If you are new to the stock market and are afraid of investing directly in shares, then this fund can be a great start for you.

Who should invest in BAF?

Investors who are coming to mutual funds for the first time.

People who are close to retirement and do not want to take much risk.

Investors who want slightly higher returns than FDs but do not want to take the risk of pure equity funds.

Investors who want to invest for 5 to 7 years or more.

Frequently Asked Questions (FAQs)

1. Are BAF and Aggressive Hybrid Funds the same?

Answer: No. Aggressive Hybrid Funds usually keep 65-80% of their money in equity at all times. On the other hand, BAF can adjust it anywhere between 30% to 80% according to market conditions. BAF is more flexible.

2. Is there no risk at all in Balanced Advantage Funds?

Answer: No, it would be wrong to say so. Since their money is invested in the stock market, there is risk in them. But their model is designed to minimize the risk. You can put them in the low-risk category.

3. For how long should one invest in BAF?

Answer: These are equity-oriented funds, so it is advisable to invest for at least 5 years or more for better returns.

4. Can I do SIP in it?

Answer: Yes, you can easily invest a little every month through SIP (Systematic Investment Plan) in any good balanced advantage fund.

5. How is its return?

Answer: Its return is expected to be less than a pure equity fund and more than a pure debt fund or FD. It aims to give you a balanced and stable return.