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Mutual funds: Key things to know before opting for balanced advantaged funds

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BAF cuts exposure to equity and increases investments in debt products when the market is overvalued and cuts debt exposure and increases investments in equity when markets are undervalued.

Mutual funds: Key things to know before opting for balanced advantaged funds
Balanced advantaged fund or BAF is a hybrid fund that has a mix of equity and debt assets. Also known as dynamic asset allocation funds (DAAFs), these funds dynamically balance the asset allocation depending on the market conditions.
How does BAF work?
These funds invest in a mix of stocks and securities, and at times may even have an arbitrage component. They keep changing this allocation based on the market conditions.
Explaining this further, Prateek Singh, Founder and CEO at LearnApp.com, said, “This varies from fund house to fund house, but the point is that there is a dynamic allocation of equity and debt based on the markets - how expensive or how cheap the markets are."
How helpful is it?
As stated earlier, BAF cuts exposure to equity and increases investments in debt products when the market is overvalued and cuts debt exposure and increases investments in equity when markets are undervalued.
So, this helps in taking advantage of lower valuations and generate considerable returns, said Adhil Shetty, CEO at BankBazaar.com while speaking to CNBC-TV18. 
"Such an investment strategy helps investors in getting the benefits of both debt and equity, and typically tends to give steady returns to investors irrespective of market conditions," he said.
The core here is that equity provides growth, and debt provides some stability.
Things to keep in mind while investing in BAF
According to Singh of Learnapp.com, an investor must first identify how much of a percentage fee they are paying to the AMC for this kind of service.
"Second, if they have the wherewithal to actually learn how to judge when markets are expensive and cheap, they can actually perform this asset allocation movement on their own without investing in a mutual fund. The advantage is that investors will not have to pay the fees that they would have to pay the mutual fund but the disadvantage is that they should have the interest to learn how this works. In most cases for people who understand markets it is not that difficult," Singh said.
Disclaimer: The views and investment tips expressed by investment experts on CNBCTV18.com are their own and not that of the website or its management. CNBCTV18.com advises users to check with certified experts before taking any investment decisions.
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