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Understanding types of hybrid funds - BAF vs flexi cap
- 4 min read 0•
- 30 Jan 2025
When it comes to investing in mutual funds, "hybrid funds" seem to confuse a lot of new investors. Within hybrid funds, two categories that often get mixed up are balanced advantage funds (BAFs) and flexi cap funds. Read on to understand the meaning and key features of both these fund types when mapping your investment journey.
What are balanced advantage funds (BAF)?
Balanced advantage funds are a type of hybrid mutual fund that invest in a dynamic mix of equity and debt. As the name suggests, they aim to balance advantage - by managing risks through flexible asset allocation. BAFs adjust the ratio between stocks and bonds depending on market conditions. When markets seem overvalued, they reduce equity and increase debt. When markets seem undervalued, they raise equity allocation to capture upside.
The fund manager actively changes the equity-debt ratio, usually within a pre-set range such as 30-80% in equities. By reallocating based on valuations, BAFs aim to optimise returns across market cycles.
Benefits of BAFs for investors
- Managing volatility by altering equity exposure
- Potentially higher returns than pure debt funds
- Lower risks than pure equity funds
- Active rebalancing by professional managers
BAFs suit investors seeking some equity participation with lower risk than pure equity funds. They offer a "middle path" between debt and equity assets dynamically.
Read More: A Comprehensive Guide on Balanced Advantage Funds
What are flexi cap funds?
Flexi cap funds are open-ended equity schemes that invest across large, mid and small cap stocks. Not to be confused with multi cap funds, flexi cap funds can allocate up to 100% in any market cap segment.
Unlike mid or small cap focused funds, flexi cap funds can shift allocation between market caps easily. For example, in expensive markets, they may cut large cap and increase mid/small cap exposure.
Features of flexi cap funds
- Invest minimum 65% in equities across market caps
- No fixed allocation, full flexibility to change market cap investments
- Potentially higher returns than large cap funds
- Higher volatility than large cap focused funds
- Managed actively by fund managers
Flexi cap funds suit equity investors seeking diversification across segments. They aim to optimise returns by tactically changing market cap allocations.
Key differences between these two types of hybrid funds
Minimum 65% in equities across market caps. Complete flexibility on market cap allocation. Remainder in debt.
Very high risk as majority stays in equities across all markets.
Potentially higher returns than BAFs over long term by staying heavily invested in equities.
Average expense ratio is around 1-2%.
| Parameter | Balanced advantage funds | Flexi cap funds |
|---|---|---|
Asset allocation | Invest in a dynamic mix of equities and debt. Allocation adjusted actively between 30-80% equity based on markets. | Minimum 65% in equities across market caps. Complete flexibility on market cap allocation. Remainder in debt. |
Risk profile | Moderate to high risk. Risk managed by reducing equity in expensive markets. | Very high risk as majority stays in equities across all markets. |
Returns | Returns depend on equity/debt allocation. Usually higher than debt funds but lower than full equity funds. | Potentially higher returns than BAFs over long term by staying heavily invested in equities. |
Costs | Tend to have higher expense ratios due to active management. Around 1.5-2.5% on average. | Average expense ratio is around 1-2%. |
Conclusion
BAFs aim for lower volatility by managing equity exposure, while flexi cap funds stay invested in equities through ups and downs. Evaluate your risk appetite and return expectations before deciding between the two. A balanced investor may prefer BAF's flexibility to manage risk dynamically through equity and debt. An equity focused investor with higher risk capacity may prefer flexi cap fund's ability to maximise stock market upside over long term.
FAQs
Which is better for senior citizens in India - BAFs or flexi cap funds?
For senior citizens, BAFs are usually more suitable than flexi cap funds in India. BAFs actively manage the equity allocation to reduce volatility as per market conditions. This helps senior investors get some equity exposure while limiting risks and capital preservation. Flexi cap funds are better suited for investors with higher risk appetite over the long term.
Can an NRI invest in BAFs and flexi cap funds in India?
Yes, NRIs can invest in both BAFs and flexi cap funds in India. NRIs need to complete KYC process and submit additional documents like an overseas address proof. They also need to comply with RBI and FEMA guidelines for investing in Indian mutual funds. The taxation and redemption rules differ slightly for NRI investors.
How often can allocation change in a flexi cap fund?
SEBI rules require multi-cap/flexi cap funds to rebalance their portfolio allocation at least once within a 3-month period. However, most flexi cap funds review asset allocation actively and make changes more frequently based on market outlook. There is no limit on how frequently they can modify large, mid, small cap allocations.
This article is for informational purposes only and does not constitute financial advice. It is not produced by the desk of the Kotak Securities Research Team, nor is it a report published by the Kotak Securities Research Team. The information presented is compiled from several secondary sources available on the internet and may change over time. Investors should conduct their own research and consult with financial professionals before making any investment decisions. Read the full disclaimer here.
Investments in securities market are subject to market risks, read all the related documents carefully before investing. Brokerage will not exceed SEBI prescribed limit. The securities are quoted as an example and not as a recommendation. SEBI Registration No-INZ000200137 Member Id NSE-08081; BSE-673; MSE-1024, MCX-56285, NCDEX-1262.
When it comes to investing in mutual funds, "hybrid funds" seem to confuse a lot of new investors. Within hybrid funds, two categories that often get mixed up are balanced advantage funds (BAFs) and flexi cap funds. Read on to understand the meaning and key features of both these fund types when mapping your investment journey.
What are balanced advantage funds (BAF)?
Balanced advantage funds are a type of hybrid mutual fund that invest in a dynamic mix of equity and debt. As the name suggests, they aim to balance advantage - by managing risks through flexible asset allocation. BAFs adjust the ratio between stocks and bonds depending on market conditions. When markets seem overvalued, they reduce equity and increase debt. When markets seem undervalued, they raise equity allocation to capture upside.
The fund manager actively changes the equity-debt ratio, usually within a pre-set range such as 30-80% in equities. By reallocating based on valuations, BAFs aim to optimise returns across market cycles.
Benefits of BAFs for investors
- Managing volatility by altering equity exposure
- Potentially higher returns than pure debt funds
- Lower risks than pure equity funds
- Active rebalancing by professional managers
BAFs suit investors seeking some equity participation with lower risk than pure equity funds. They offer a "middle path" between debt and equity assets dynamically.
Read More: A Comprehensive Guide on Balanced Advantage Funds
What are flexi cap funds?
Flexi cap funds are open-ended equity schemes that invest across large, mid and small cap stocks. Not to be confused with multi cap funds, flexi cap funds can allocate up to 100% in any market cap segment.
Unlike mid or small cap focused funds, flexi cap funds can shift allocation between market caps easily. For example, in expensive markets, they may cut large cap and increase mid/small cap exposure.
Features of flexi cap funds
- Invest minimum 65% in equities across market caps
- No fixed allocation, full flexibility to change market cap investments
- Potentially higher returns than large cap funds
- Higher volatility than large cap focused funds
- Managed actively by fund managers
Flexi cap funds suit equity investors seeking diversification across segments. They aim to optimise returns by tactically changing market cap allocations.
Key differences between these two types of hybrid funds
Minimum 65% in equities across market caps. Complete flexibility on market cap allocation. Remainder in debt.
Very high risk as majority stays in equities across all markets.
Potentially higher returns than BAFs over long term by staying heavily invested in equities.
Average expense ratio is around 1-2%.
| Parameter | Balanced advantage funds | Flexi cap funds |
|---|---|---|
Asset allocation | Invest in a dynamic mix of equities and debt. Allocation adjusted actively between 30-80% equity based on markets. | Minimum 65% in equities across market caps. Complete flexibility on market cap allocation. Remainder in debt. |
Risk profile | Moderate to high risk. Risk managed by reducing equity in expensive markets. | Very high risk as majority stays in equities across all markets. |
Returns | Returns depend on equity/debt allocation. Usually higher than debt funds but lower than full equity funds. | Potentially higher returns than BAFs over long term by staying heavily invested in equities. |
Costs | Tend to have higher expense ratios due to active management. Around 1.5-2.5% on average. | Average expense ratio is around 1-2%. |
Conclusion
BAFs aim for lower volatility by managing equity exposure, while flexi cap funds stay invested in equities through ups and downs. Evaluate your risk appetite and return expectations before deciding between the two. A balanced investor may prefer BAF's flexibility to manage risk dynamically through equity and debt. An equity focused investor with higher risk capacity may prefer flexi cap fund's ability to maximise stock market upside over long term.
FAQs
Which is better for senior citizens in India - BAFs or flexi cap funds?
For senior citizens, BAFs are usually more suitable than flexi cap funds in India. BAFs actively manage the equity allocation to reduce volatility as per market conditions. This helps senior investors get some equity exposure while limiting risks and capital preservation. Flexi cap funds are better suited for investors with higher risk appetite over the long term.
Can an NRI invest in BAFs and flexi cap funds in India?
Yes, NRIs can invest in both BAFs and flexi cap funds in India. NRIs need to complete KYC process and submit additional documents like an overseas address proof. They also need to comply with RBI and FEMA guidelines for investing in Indian mutual funds. The taxation and redemption rules differ slightly for NRI investors.
How often can allocation change in a flexi cap fund?
SEBI rules require multi-cap/flexi cap funds to rebalance their portfolio allocation at least once within a 3-month period. However, most flexi cap funds review asset allocation actively and make changes more frequently based on market outlook. There is no limit on how frequently they can modify large, mid, small cap allocations.
This article is for informational purposes only and does not constitute financial advice. It is not produced by the desk of the Kotak Securities Research Team, nor is it a report published by the Kotak Securities Research Team. The information presented is compiled from several secondary sources available on the internet and may change over time. Investors should conduct their own research and consult with financial professionals before making any investment decisions. Read the full disclaimer here.
Investments in securities market are subject to market risks, read all the related documents carefully before investing. Brokerage will not exceed SEBI prescribed limit. The securities are quoted as an example and not as a recommendation. SEBI Registration No-INZ000200137 Member Id NSE-08081; BSE-673; MSE-1024, MCX-56285, NCDEX-1262.