How are Balanced Advantage Fund earnings taxed?

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HIGHLIGHTS

  • BAFs invest in both equities and debt securities
  • BAFs are taxed based on their exposure to the asset class
  • If the equity allocation is 65%, equity tax standards would be imposed
New Delhi: If you want to invest in the stock market, but don’t have time to track it, Balanced Advantage Funds would be the right fit for you.
These funds invest in the equity and debt market depending on market conditions. Santosh Navlani, COO of The ET Money Show, says: “A BAF can increase the equity allocation to 80% or more when markets are ‘cheap’ or reduce it to 20% or less when stocks get ‘expensive’. . In short, BAFs help you stay on top of Warren Buffett’s investment strategy, which is to “Be fearful when others are greedy and be greedy when others are fearful.” ”

Therefore, this brings us to a question: how are BAFs taxed?

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If BAFs retain 65% of their equity allocation, then they are eligible for short-term capital gains tax of 15% if held for less than one year and Long-term capital gains tax by 10% if the returns exceed Rs. 1 Lakh and redeemed after one year. If at any time the equity allocation decreases, the balance will be invested in arbitrage to reach the set threshold. So most of the time, says Santosh Navlani, “BAF returns are usually taxed according to equity taxation standards. In rare cases, the funds do not invest in the arbitrage option, but use rather the debt route.These funds will be taxed according to the debt and that would be expensive for the investors.

However, one should not worry about taxation as these schemes are best suited for long-term investments. Santosh Navlani advises these programs only to risk-averse investors who want to stay put for at least 5-7 years.

Note that Balanced Advantage funds are also called dynamic asset allocation funds in the financial world.

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