A reader asks, “I understood the importance of asset allocation/annual rebalancing exercise from your old article. I see the below text by one of the leading BAFs (see link below) – When investors manually move their money between equity and debt, they could be subjected to taxes on the capital gains made in the short term. However, when fund managers move between the two asset classes as a part of their routine rebalancing, they need not pay these taxes because of the way the fund is structured. Furthermore, even after the rebalancing, the tax treatment of the fund continues to remain equity-oriented, which is ultimately beneficial for investors, as equity funds pay a lower tax rate as compared to debt funds.”
“Could you write an article on the utility of investing in Balanced Advantage Funds (BAFs) instead of doing asset rebalancing personally? Won’t the BAFs give broadly similar returns of a 60E:40D/ 50E:50D asset allocation?
The short answer to the reader’s question is never use balanced advantage funds, dynamic asset allocation funds, or any other mutual fund for that matter, as a one-fund portfolio to save on rebalancing costs or tax! Here’s why.
Balanced Advantage Funds have a largely unknown investment strategy. The reasons behind their security selection and asset allocation calls are also unknown. While rebalancing costs and taxes are reduced, the fund management risk is too high to favour such a convenience.
For example, the fund mentioned by the reader is Kotak Balanced Advantage. The levels of corporate bonds in the fund between Aug 2018 to May 2022 have varied from 0.4% to 21.6%. The levels of gilts have varied from 0.7% to 21.5%. Equity allocation is a lot more sedate (to maintain the tax status of the fund), from 63% to 75%. The same is true of bond duration too. In the period mentioned above, the allocation of bonds maturing over 5Y has varied from 2% to almost 22%. Such variations are common to all funds in this category.
Join over 32,000 readers and get free money management solutions delivered to your mailbox! Subscribe to get posts via email! 🔥Enjoy massive discounts on our robo-advisory tool & courses! 🔥
There are too many unknowns and uncertainties in funds of this category to use as the only fund in a portfolio. Also, we have shown earlier a continuous de-risking strategy is essential to reach our goals regardless of market conditions. So while their equity-like allocation is appealing from a taxation point of view, it is not suitable for goal-based investing as a solo fund.
Moreover, there is too much concentration risk in using only one fund for our goal(s) especially when it is actively managed. Any crisis or scam affecting the fund house can result in redemption pressure in the fund.
Therefore it is better to use a mix of equity funds or equity-oriented hybrid funds and fixed income products (including debt-oriented hybrid funds) in a portfolio than to rely on a single hybrid fund. The risks are too high. It would be better to diversify the fund management risk among a few funds and rebalance and reduce equity allocation periodically in a goal-based manner.
🔥Enjoy massive discounts on our courses, robo-advisory tool and exclusive investor circle! 🔥& join our community of 5000+ users!
Use our Robo-advisory Tool for a start-to-finish financial plan! ⇐ More than 1000 investors and advisors use this!
New Tool! => Track your mutual funds and stocks investments with this Google Sheet!
- Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
- Have a question? Subscribe to our newsletter with the form below.
- Hit 'reply' to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.
Join over 32,000 readers and get free money management solutions delivered to your mailbox! Subscribe to get posts via email!
Explore the site! Search among our 2000+ articles for information and insight!
About The Author
Dr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter or Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! ⇐ More than 3000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter what the market condition is!! Watch the first lecture for free! One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course! Increase your income by getting people to pay for your skills! ⇐ More than 700 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts you and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!
Our new book for kids: “Chinchu gets a superpower!” is now available!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook is for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or you buy the new Tactical Buy/Sell timing tool!
We publish monthly mutual fund screeners and momentum, low volatility stock screeners.
About freefincal & it's content policy. Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified with credible and knowledgeable sources before publication. Freefincal does not publish paid articles, promotions, PR, satire or opinions without data. All opinions will be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
- Twitter @freefincal
- Subscribe to our Youtube Videos
- Posts feed via Feedburner.
Our publications
You Can Be Rich Too with Goal-Based Investing
Published by CNBC TV18, this book is meant to help you ask the right questions and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want
This book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.Your Ultimate Guide to Travel
This is an in-depth dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and how travelling slowly is better financially and psychologically, with links to the web pages and hand-holding at every step. Get the pdf for Rs 300 (instant download)