Don't compare balanced advantage funds with FDs, debt mutual funds

If some mutual fund advisors and bank sales force are to be believed, balanced advantage funds are the safest investment option in the mutual fund universe

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If some mutual fund advisors and bank sales force are to be believed, balanced advantage funds are the safest investment option in the mutual fund universe. Balanced advantage funds (or BAFs, as they are known among mutual fund advisors) are sold as a perfect alternative to fixed deposits these days. False promise of 10 per cent returns and regular dividends are touted as added advantage. Add to that dynamic rebalancing of the equity portion and lower taxes (mercifully, these claims are true), and investors have a near perfect investment vehicle for their every need or they are told.

"Mis-selling is common with not only balanced advantage funds but the entire hybrid fund category. Two years ago, many distributors and banks officials sold these schemes as 'safe' to many investors who wanted fixed income products," Gaurav Monga, Director, PxG Consultants.

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"There was a time when investors used to come to me and say they want to invest in balanced advantage funds and I had said no to many of them. These schemes were mostly sold to retired people with the bait of safety and dividends. The market was doing well, so they had the support of the past performance as well. Many burnt their hands when the market fell," says Monga.

Mutual fund advisors say many investors are not familiar with the balanced advantage category. That is why they are falling for such tall claims. For the uninitiated, according to Sebi categorisation, the balanced advantage or dynamic asset allocation schemes manages investments in equity and debt dynamically. Simply put, these schemes manage their equity part based on the prevailing market conditions or valuations. Mutual fund houses follow their own criteria to increase or decrease equity allocation based on their outlook for the stock market.

For example, ICICI Prudential Balanced Advantage Fund, the largest fund in the category with an AUM of little over Rs 27,000 crore, has an equity exposure of around 55 per cent. The scheme has invested around 28 per cent in debt, and the remaining in cash and cash equivalent, according to Value Research, a mutual fund tracking firm.

The scheme has offered 8.49 per cent returns in the last one year, 8.12 per cent in the last three years, and 9.09 per ent in the last five years.

"BAF has been marketed as schemes that can switch from equity to debt if needed. Investors need to understand that taking such calls is very difficult. Even if you are 90 per cent in debt and 10 per cent in equity, a sharp fall in equity can deplete all your returns," says Pankaj Gera, a Certified Financial Planner. "Many investors had taken up the dividend option in balanced advantage funds and were very happy till the markets started falling."

Gaurav Monga also cautions investors about being complaisant about the equity exposure of these schemes. "Any scheme which as any equity exposure, be it 10 per cent or 30 per cent, it is not as safe as the debt funds. I am not saying debt funds are safe, but they are relatively safer option than BAF," he says.

Gera says some distributors sold it by saying that BAF is less risky than the erstwhile balanced fund (aggressive hybrid fund, after the re-categorisation). "However, taking this category to be anywhere close to FDs or debt funds is a big mistake," he says.

Mutual fund advisors say investors should choose debt mutual funds, preferably short-term schemes, and arbitrage funds if they want to park their money for short periods.

"If you are in the 10 percent tax bracket and retired, go for FDs, if you want complete safety. If you are in a higher tax bracket and have a three year holding period, opt for short duration bond funds or corporate bond fund. If you don't have a three year holding period, go for arbitrage funds," says Gaurav Monga.

Arbitrage funds are considered equity schemes for the purpose of taxation. That means investments in these schemes held over a year qualify for long term capital gains tax of 10 per cent on gains of over Rs 1 lakh in a financial year. If investments are sold before a year, gains are treated as short-term capital gains and taxed at 15 per cent.

Best arbitrage mutual funds to invest in 2019 Pankaj Gera says investors who want a similar product like FD should choose a debt fund that matches their investment horizon so they are safe when the yields move. "Choose a short to medium duration fund if you are investing for three years."

Investments in debt mutual funds qualify for long-term capital gains tax of 20 per cent with indexation benefit. If debt investments are sold before three years, short term capital gains are added to the income and taxed according to the income tax slab applicable to the investor.

Best short duration or short term mutual fund schemes to invest in 2019
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