The little ghost Betaal was once again on the prowl. He was trying to locate Vikram. He had got information that Vikram was passing through the forest.

After a long wait he heard footsteps that didn’t disappoint him. Vikram was near by. Like always Betaal took flight and landed on Vikram’s shoulders.

“Now what is it?” Vikram asked. Betaal smiled, “Explain what is a Balanced Advantage Fund? Explain if you wish to remain intact. I can crush your head any moment but here is your chance to live. Explain the Balanced Advantage Fund.”

Vikram never took such threats seriously. But he loved such challenges and was always game for it.

So began Vikram, “Balanced Advantage Fund is a little tough to describe. All the short selling bit. Let me try explaining with the help of a story :-

A king got his best worker to do a task.

The worker went about the task with complete sincerity. But as time went by he started getting tired.The king feared his worker’s output would drop. The worker too felt his productivity was suffering.

So after sometime, when his output started dropping, the worker deployed his son to help him.Thus his loss in output was compensated by his son.

The BAF or Balanced Advantage Category works a little like this.The loss of equity in a falling market is offset by shorting Nifty futures.

Shorting  refers to selling without actually owning the index and settling the the loss or gain at a later date called expiry date that occurs towards the end of the month.

So basically by shorting one stands to gain from a loss in the market and this gain reduces the impact of the equity loss.

On the other hand in a rising market, this shorting (selling without owning on the condition of squaring off on expiry) causes a loss which gets deducted from is the equity gains made in the rising market.

Thus a Balanced Advantage Fund softens the fall as well as limits the rise. It causes less volatility as compared to the market.

This fund is suitable for risk averse investors who also wish to benefit from the markets as well.

Although a Balanced Fund needs to maintain a 65% exposure to equities, a Balanced Advantage Fund is run in such a way that it works exactly in the manner a fund would work if its equity exposure is reduced upto 20% to 30% in a falling market.

The Balanced Advantage Fund is the perfect “asset allocation” fund one could invest in. Also it is treated like an equity fund with equity taxation.

It is suitable for 3 years and above and can be expected to give “returns” that lie between a Balanced Fund and an Equity Savings Fund (about which I had sent a note a couple of days back)Thus one can expect CAGR returns in the range of 10% to 12%

Like the son helped the worker do his job and shared his wages likewise the short selling helps the fund do its job of providing stable returns at a cost of some premium that occurs for using derivative mechanism of shorting.

So both the worker and the fund sacrice a little but ensure that the job got done.”

Vikram looked at Betaal and wondered whether Betaal followed his explanation. Fortunately the Betaal was smiling. “Nobody in this Kingdom has your wisdom Vikram. Nobody I am sure has the ability to explain such a comes product in such a lucid fashion.. I love your analogies and hence will spare you one more time. But let me remind you before I go that I will be back soon with another question”

Saying this Betaal flew away into the darkness of night and Vikram continued to walk through the forest in a calm and composed manner.

  • Dutt Sharma
    Posted at 18:45h, 26 October Reply

    Nice hilarious way to explain BAF ..

  • Madhu M S
    Posted at 22:47h, 26 October Reply

    Very interestingly explained.

  • Rajesh Nagaria
    Posted at 23:43h, 26 October Reply

    Excellent explanation.

  • S V Rama Raju
    Posted at 00:41h, 27 October Reply

    Clear explanation to understand

  • S V Rama Raju
    Posted at 00:43h, 27 October Reply

    Balanced advantage fund

  • Prem Pal Singh
    Posted at 00:47h, 27 October Reply

    Explained the complex matter in a very simple way

  • Anuradha Kannan
    Posted at 03:04h, 27 October Reply

    Very nice explanation

  • Sushil kumar
    Posted at 10:33h, 27 October Reply

    Sir great initiative. Explained in a very simple language.

    Well done. Cheers…

  • Paresh Dhembare
    Posted at 12:23h, 27 October Reply

    Very well explained

  • Pravin P. Bang.
    Posted at 12:42h, 27 October Reply

    Sir, The superb example to explain complicated matter in a simple way.Thanks.

  • Ravi v
    Posted at 13:09h, 27 October Reply

    Nicely explained with story

  • Prabir Sur
    Posted at 13:55h, 27 October Reply

    Nice explanation.
    But what about taxation angle.
    If one hold for more than one year then the return will be tax free???
    Which category of fund will give capital appreciation with low volatility?
    1. Balanced advantage fund. Or
    2 Equity savings fund?
    If one does an SWP after investing a lumpsum in these fund.for say 8% annualized withdrawal in monthly withdrawal. mode.
    Kindly explain Sir.

    • Dhramendra Satapathy
      Posted at 10:22h, 01 November Reply

      low volatility will be equity savings as compared to this. For swp it depends on risk appetite etc. Ideal fund for SWP in my view is Balanced Fund

  • Ramakrishna I V
    Posted at 14:44h, 27 October Reply

    Well explained

  • Dr. Avinash Gokhale
    Posted at 14:56h, 27 October Reply

    Dr.Avinwsh Gokhale -XCELLENT EXPLANATION OF Ball. Adv. Fund, Sir!

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