Explained: What is the difference between balanced advantage funds and aggressive hybrid funds?

Investing in mutual funds can be a way to diversify your portfolio and achieve financial goals. However, with different kinds of fund types available, it’s important to understand the differences to make informed decisions. Two such fund types that often cause confusion are Balanced Advantage Funds (BAFs) and Aggressive Hybrid Funds (AHFs). Let’s understand what sets these two apart.What are these funds?

Aggressive hybrid funds:Aggressive hybrid funds are mandated to invest up to 75% of their assets in equity and the remaining in fixed-income instruments. Other than the usual mixture of debt and equity, these funds take advantage of an arbitrage opportunity. In arbitrage, the fund manager buys securities at a low price in one stock exchange and sells them at a higher price in the other. Hence, the gains are accrued as a result of the price differential.

Balanced advantage fund: Balanced advantage funds are schemes with a dynamic asset allocation strategy and they too invest in a mix of equity and debt. The fund dynamically manages allocation between the two, which is usually driven by a philosophy or a methodology developed by the fund house.

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How are these funds different?

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The key difference between these two categories is asset allocation. In an aggressive hybrid fund, the equity allocation is around 65-80% and rest in fixed income. This provides them a more consistent approach to growth with a moderate level of risk management.

On the other hand, the asset allocation in a balanced advantage fund is dynamic which means that the full allocation can be in equity or in debt depending on the fund manager’s decision based on market conditions. This flexibility in balanced advantage funds allows them to be more responsive to market changes, potentially offering better protection during downturns and taking advantage of growth periods. Balanced advantage funds invest in a mix of stocks, debt, and arbitrage opportunities. These funds decide their equity exposure depending on key market ratios or in-house parameters. They invest less in stocks when the market is very high or valuations are stretched. They invest more in equity when stocks are available at attractive valuations. In short, BAFs do the job of juggling equity exposure for investors.

Performance

In the last one year, aggressive hybrid funds offered an average return of around 31.20% with the highest being offered by JM Aggressive Hybrid Fund which gave 54.21% return.
On the other hand, the balanced advantage fund offered an average return of 24.31% in the last one year with the highest being offered by HDFC Balanced Advantage Fund which gave 40.87% return. HDFC Balanced Advantage Fund is the largest equity mutual fund based on assets managed.
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Who should invest?

Mutual fund advisors typically recommend aggressive hybrid fund schemes to ‘conservative’ equity investors to create wealth to achieve their long-term financial goals.

Invest in balanced advantage funds only if you can tolerate the risk of investing in stocks. Also, invest only if you have an investment horizon of at least five years.

Recommendation

Aggressive hybrid fund: If you are looking for recommendation: Best aggressive hybrid mutual funds to invest in July 2024

Balanced advantage fund: If you you are looking for recommendation: Best balanced advantage funds or dynamic asset allocation funds to invest in July 2024.