It is no secret today that diversification of mutual funds is extremely important in any form of investment. But the process of manually diversifying a portfolio can be difficult for a number of different reasons. To begin, you will need to have a solid understanding of the various asset classes and how they react to various changes in market conditions. Investors who are not very experienced in the financial markets may find this to be a challenging situation. Second, manually diversifying a portfolio can be a time-consuming process because it requires conducting research and finding investments that are suitable for the portfolio, followed by routinely rebalancing the portfolio to ensure that it continues to be diversified. Last but not least, if you do not have access to a significant sum of money, it may be challenging to construct a portfolio that is adequately diversified because certain asset classes, such as real estate and private equity, may have high minimum investment requirements.
Here, investing in balanced funds or balanced advantage funds provide diversification by default. But how do these two options differ? Read on to find out.
What are balanced funds?
Balanced funds are a form of hybrid fund that invests approximately equally in debt and equity asset types. All hybrid funds divide their assets fairly between equity and debt securities, but they may be tilted more toward one asset class due to increased investment percentages. Balanced funds distribute the fund corpus to both asset classes in a balanced ratio. They invest according to the 60%-40% rule, which allocates 60% of the capital to one sector and the remaining 40% to the equity and debt segments. While this allocation may be switched, it can only do so by 20%, meaning that a 60% allocation of one asset class can be reduced to 40%, and a 40% allocation of another asset type can be increased to 60%.
What are balanced advantage funds?
Balanced advantage funds, which invest in both equity and debt, are another sort of hybrid fund. Unlike other hybrid plans, they are very flexible and do not require a preset asset allocation percentage. They have the ability to invest the fund’s resources in any money market instrument and in any ratio. Furthermore, unlike the other hybrid funds, these do not have a fixed fund allocation rule and can swap between asset classes flexibly based on market movements. As a result, balanced advantage funds are often referred to as dynamic asset allocation funds.
For instance, when markets hit a high and become overpriced, the value of these funds may fall. As a result, fund allocations are shifted from stocks to debt, preserving capital gains while also creating a stream of fixed income.
Which is a better choice?
Both balanced funds and balanced advantage funds have their advantages and disadvantages, but balanced funds are better suited for investors with low to moderate tolerances for risk, while balanced advantage funds are best for investors with moderate to high-risk appetites. Therefore, you should pick according to the level of risk you are willing to take and the objectives you have for your investments.
Conclusion
Balanced funds and balanced advantage funds are both options for investors looking for diversification in their portfolio through a combination of debt fundv and equity securities. While both types of funds offer the diversification, they differ in terms of the level of flexibility they offer in terms of asset allocation. It is important to consider your investment objectives and risk tolerance when deciding which type of fund is right for you. As with any investment decision, it is recommended to consult with a financial advisor or professional before making a final decision.
