Balanced advantage funds (BAFs), also known as dynamic asset allocation (DAA) funds, suit volatile and uncertain markets by providing equity participation while containing downside risk. In 2025, a difficult year for equities, BAFs delivered a category average return of 5.2 per cent, outperforming flexicap funds (3.6 per cent), midcap funds (2.4 per cent), and smallcap funds (-5.5 per cent).
According to monthly data from the Association of Mutual Funds in India (Amfi), 35 BAFs managed about Rs 3.23 trillion worth of assets as on December 31, 2025. They received net inflows of about Rs 16,518 crore in 2025.
BAFs invest across equities and debt, with allocations guided by internal models that respond to market conditions and valuations. Fund managers construct portfolios within these allocations and continually review the mix. Some asset management companies (AMCs) follow a counter-cyclical approach. Others take a pro-cyclical approach, raising equity exposure when markets trend up, and vice versa.
“BAFs offer a framework-driven way for investors to navigate volatile markets by dynamically adjusting exposure between equities and debt. The key objective is not to maximise returns, but to offer stability and diversification benefits,” says Sorbh Gupta, head – equity, Bajaj Finserv Asset Management.
BAFs also address the asset-allocation challenge for investors. “Most people know they should own both equity and debt, but they struggle to decide when to lean more towards growth (equity) versus stability (bonds). These funds’ mandate is to make those shifts systematically or discretionarily,” says Ravi Kumar TV, founder, Gaining Ground Investment.
BAFs often hold up better than diversified equity peers in choppy, range-bound phases. Their calendar-year returns have not turned negative in any of the past 10 years.
However, BAFs can lag in strong bull markets because they moderate equity exposure. They delivered average returns of 18.6 per cent in 2023 and 13.1 per cent in 2024, respectively, underperforming most diversified equity categories.
“During strong and sustained market rallies, returns may be lower compared to pure equity funds as equity exposure is moderated,” says Viraj Gandhi, chief executive officer (CEO), Samco Mutual Fund.
Well-suited to current scenario
Given the uncertain outlook for equity markets, BAFs may offer a steadier ride than pure equity funds this year. “Given the current geopolitical and global trade-related uncertainties surrounding the equity markets, BAFs are likely to show less volatility compared to pure equity funds,” says Gupta.
“In 2026, BAFs are likely to play a stabilising role given the mixed market backdrop. Investors should expect relatively steadier returns than pure equity funds, with better downside control,” says Gandhi.
BAFs are not risk-free. They carry market risk and portfolio volatility. Monthly and quarterly returns can turn negative. “BAFs often create a false sense of downside protection. But meaningful drawdowns can occur in the short term,” says Kumar. He adds that the debt portion is exposed to interest rate, credit, and liquidity risks.
BAFs’ actively managed approach can push up costs. “Since BAFs follow an actively managed strategy, they typically come with higher costs compared to passive or static allocation approaches. This can impact net returns,” says Gupta.
BAFs suit investors who seek equity participation with lower volatility, provided they maintain the right time horizon and allocation discipline. “Investors with a three–five year horizon who want equity participation and simplicity but do not like too much volatility can consider these funds. A 10–30 per cent allocation is reasonable for retail investors,” says Kumar.
 "Moderate-risk investors may choose balanced advantage funds for 2026")
