Know Your Funds: Balanced Advantage vs. Aggressive Hybrid – What Sets Them Apart?

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Mutual funds are a popular investment option for many people who want to diversify their portfolio and achieve their financial goals. However, not all mutual funds are the same. Each mutual fund caters to investors with different risk appetites, return expectations, and investment horizons.

A common dilemma that investors face is whether to invest in equity funds or debt funds. Equity funds invest in stocks of companies and have the potential for higher returns, but also carry higher risks. Debt funds invest in fixed income securities, such as bonds and treasury bills, and offer lower but more consistent returns, with lower risks.

However, investing in only one asset class may not be optimal for every investor. For instance, investing only in equity funds may expose the investor to high volatility and market fluctuations, which may erode the value of the portfolio in the short term. On the other hand, investing only in debt funds may limit the growth potential of the portfolio and may not beat inflation in the long term.

Therefore, many investors look for a middle ground that can offer them the best of both worlds: a mix of equity and debt that can balance the risk and return trade-off. This is where hybrid funds come in. Hybrid funds are mutual funds that invest in both equity and debt instruments, in varying proportions, depending on the fund's objective and strategy.

There are different types of hybrid funds that are often considered by investors who want a balanced exposure to equity and debt. Let’s compare and contrast two types of hybrid funds that are popular among investors: Balanced Advantage Funds (BAFs) and Aggressive Hybrid Funds. 

What are Balanced Advantage Funds (BAFs)?

Balanced Advantage Funds (BAFs) are hybrid funds that have flexible asset allocation that can, based on market conditions, swing from 0% to 100% in equity or debt, at the fund manager's discretion. BAFs can switch between different market segments, such as large-cap, mid-cap, small-cap, etc., depending on their valuation and growth prospects. BAFs can also use derivatives, such as futures and options, to hedge their exposure or enhance their returns.

The main advantage of BAFs is that they can dynamically adjust their asset allocation to suit the changing market scenarios. For instance, when the equity market is bullish, BAFs can increase their equity exposure to capture the upside potential. When the equity market is on a downswing, BAFs can reduce their equity exposure to protect the portfolio. This way, BAFs aim to deliver consistent returns across market cycles, with lower volatility than pure equity funds.

BAFs are suitable for investors who want exposure to equity and debt, with lower volatility than pure equity funds. BAFs can also help investors avoid timing the market, as the fund manager takes care of rebalancing the portfolio according to the market signals. BAFs are ideal for investors who have a moderate risk appetite and a long-term investment horizon.

What are Aggressive Hybrid Funds?

Aggressive Hybrid Funds are hybrid funds that have a stable asset allocation that does not change much with market conditions. They typically invest around 65-80% of their assets in equity and around 20-35% of their assets in debt. Aggressive Hybrid Funds can also diversify their portfolio across different sectors and segments of the equity and debt markets.

The main advantage of Aggressive Hybrids is that they can offer a higher exposure to equity than BAFs, with some cushion from debt. They can benefit from the long-term growth potential of equity, while also generating some income from debt. 

Aggressive Hybrid Funds are suitable for investors who want to achieve their long-term financial goals, such as retirement planning or wealth creation. They are ideal for investors who have a high risk appetite and a long-term investment horizon.

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Key Differences between BAFs and Aggressive Hybrids

What sets BAFs apart from Aggressive Hybrids is their flexibility to go all out on debt and equity. This means that fund managers for BAFs have more options, and are less restricted in both evasive maneuvers when risks come up, and can make strategic moves when the market looks buoyant. 

Learn more about how BAFs can help your portfolio both hedge market risks and grow at a steady pace, here. 

An Investor Education initiative by Sundaram Mutual

One-time KYC (Know Your Customer) is mandatory to invest in mutual funds. You can complete your eKYC here: https://invest.sundarammutual.com/. Investors must deal with/invest in only SEBI Registered Mutual Funds. Details are available at www.sebi.gov.in. Complaint Redressal: Investors can reach us on 1860 425 7237 or write to us at customerservices@sundarammutual.com. For escalation, write to grievanceredressal@sundarammutual.com or lodge your grievance with SEBI through their SCORES (SEBI Complaint Redressal System) Portal at https://scores.gov.in. If you are still not satisfied with the redressal from SEBI SCORES, you can further initiate dispute resolution through the ODR Portal at https://smartodr.in/login.

Mutual fund investments are subject to market risks, read all scheme related documents carefully.

Moneycontrol Journalists were not involved in the creation of the article.