Hybrid Mutual Fund is a scheme of mutual funds in which investments are made in more than one asset class. Asset allocation is a must for every investor's portfolio, because it helps investors to balance risk and return to achieve their own financial goals. While investors balance their portfolio by investing in equity and debt mutual funds, hybrid funds offer exposure to both asset classes at the same place. Hybrid mutual funds also provide tax efficient solutions, Different categories of hybrid funds offer solutions for investors of different risk profiles ranging from aggressive to conservative profiles. Investors who invest in bank FDs, this scheme may be suitable for them
Key feature the balanced advantage fund?
Balanced Advantage Funds are hybrid mutual funds that manage their assets dynamically between equity and debt. There is no upper or lower limit on equity and debt allocation by SEBI for Balance Advantage Fund. So, the fund manager can keep the equity exposure from 30% to 80% as per the market conditions. As per rules the scheme should have 65% equity at any point of time for taxation of equity. So when the fund manager at any point in time reduces the cash equity exposure in the scheme below 65%, the equity exposure hedges the same from derivatives to maintain 65%. Generally, Equity Taxation is available in Balanced Advantage Fund. However, you should consult with your financial advisor to know the taxation of specific balanced advantage funds.
Asset Allocation of Balanced Advantage Funds
Active (Net) Equity: The equity allocation of active equity allocation or hedging is determined by the net dynamic asset allocation model.
Fixed income or debt allocation is usually capped at 35% to avoid non-equity taxation.
Arbitrage: This is the fully hedged equity component which is not exposed to market risks. The arbitrage component not only reduces risk it also generates arbitrage (risk-free) profits based on price differences in cash and futures market or corporate actions. It also enables these schemes to enjoy equity taxation.
Asset Allocation Models
There are mainly two types of models adopted by fund houses, one is counter-cyclical model and the other is pro-cyclical model.
Counter – cyclical model - The main object of this model is to buying at lower and selling at high. Counter-cyclical models increase equity allocation in falling markets and decrease equity allocation in rising markets. Different fund managers use different valuation metrics for dynamic asset allocation. P/E, P/B etc.
Pro – cyclical model - Pro-cyclical model tries to follow the trend. In the pro-cyclical model, fund managers increase their equity allocation in rising markets and decrease it in falling markets. Pro-cyclical models are based on market trend indicators (daily moving averages) and indicators of trend strength/health (standard deviation, downside deviation, etc.). Some pro-cyclical models may use other factors such as valuations, macro-economic factors, etc.
Balanced advantage fund V/S Aggressive hybrid fund
Hybrid funds that follow fixed allocation maintain their equity and fixed income allocation within a certain range. Aggressive hybrid funds maintain their equity allocation between 65% and 80% and fixed income allocation between 20% and 35%.
Balanced Advantage Funds dynamically change their asset allocation based on market conditions. The net equity allocation of Balanced Advantage funds can be up to 80% in certain market conditions and as low as 30% in certain situations.
Aggressive hybrid funds tend to be quite volatile in bear markets. Balance advantage funds are generally less volatile than hybrid funds.
Some scheme performance
There are some schemes in this category which have performed well in their category in one, three and five years.
This scheme may be suitable for investors who have low risk appetite and can beat inflation by earning a little more than bank deposits or any equivalent scheme in three to