What are Balanced Mutual Funds: Meaning, Types, and Returns

Dive into the dynamics of balanced mutual funds, where prudent asset allocation meets risk management.
What are Balanced Mutual Funds?
4 mins
9 January 2024

Balanced mutual funds are hybrid funds which combine the features of both equity and debt instruments, striking a balance between risk and return. They are an ideal choice for investors looking for diversification while aiming to mitigate risk.

Understanding Balanced Funds

Balanced funds invest in a mix of equity and debt instruments. The exact allocation of equity and debt varies depending on the fund, but most balanced funds invest between 60% and 75% in equities (stocks) and the rest in debt (bonds and fixed-income securities) or vice versa. The goal of this allocation is to provide investors with a balanced portfolio that can help reduce risk while still providing the potential for growth.

How Does a Balanced Fund Work?

The primary objective of a balanced fund is to provide investors with a balanced approach to investing. This means the fund manager aims to generate returns while managing risk. The equity component offers the potential for capital appreciation, while the debt component provides stability and income.

The allocation between equity and debt is determined based on the fund's investment mandate. For instance, an aggressive balanced fund may have a higher equity allocation (around 65 to 80%) and a lower debt allocation (around 20-35%). Conversely, a conservative balanced fund may have a lower equity allocation (around 10-25%) and a higher debt allocation (around 75-90%).

Advantages of Balanced Funds

  1. Diversification: Balanced funds automatically diversify your investments across asset classes, reducing the risk associated with investing in a single asset type.
  2. Risk Management: The combination of equities and debt helps manage market volatility. During periods of market turbulence, the debt component can act as a stabiliser.
  3. Professional Management: Balanced funds are actively managed by experienced fund managers who make informed decisions about asset allocation to optimise returns.
  4. Simplified Investing: For investors looking for an all-in-one solution, balanced funds provide a simplified way to access equity and debt markets without the need for managing multiple investments.

Disadvantages of Balanced Funds

  1. Moderate Returns: Balanced funds may not generate returns as high as pure equity funds during bull markets, limiting the growth potential.
  2. Fees: Balanced funds typically come with management fees like almost other types of mutual funds, which can reduce the overall returns. types of mutual funds, which can reduce the overall returns.
  3. Interest Rate Risk: The debt component of balanced funds is exposed to interest rate fluctuations, which can impact the returns from the debt portion.
  4. Lack of Customisation: Balanced funds have predetermined asset allocation ratios that may not align with your specific risk tolerance or financial goals.

Who Are Balanced Funds Suitable For?

Balanced funds cater to a wide range of investors. They are ideal for those who:

  • Are looking for capital preservation with moderate risk.
  • Seek a steady income stream along with the potential for capital appreciation.
  • Want a simplified investment approach.
  • Don't have the time or expertise to manage multiple investment options.
  • Are looking for diversification without the need to track different securities.

Taxation

Balanced funds capital gains are taxed based on their equity-debt orientation. Equity-based balanced funds (if equity component exceeds 65%) are taxed like pure equity funds. Long-term capital gains (LTCG) earned on the sale of mutual fund units after a holding period of 1 year are tax-free up to Rs. 1 lakh. LTCG exceeding Rs. 1 lakh is taxed at 10%, excluding the indexation benefit. Short-term capital gains, which are earned on the redemption of units before a holding period of 1 year, are taxed at a rate of 15%. Debt-based balanced funds are taxed like debt funds. STCG earned on investments held for less than 3 years are taxed according to one’s applicable tax slab. LTCG earned on redeeming units after 3 years are taxed at 20%, along with indexation benefits.

Things to Consider When Investing in a Balanced Fund

When contemplating investment in balanced mutual funds, several key considerations merit attention:

  • Expense Ratio: Hybrid or balanced funds, like other mutual funds, entail an expense ratio. This percentage represents the fee charged by the asset management company for its services. A higher expense ratio directly impacts the overall investment cost.
  • Past Performance Evaluation: Prospective investors should diligently assess the historical performance of a balanced fund. While past performance is crucial for insights, it doesn't guarantee future returns. Nevertheless, analysing a fund's track record provides a rough estimate of potential returns.
  • Risk Assessment: Although balanced funds are perceived as less risky than equity funds, inherent risks persist in all mutual fund investments. Investors must carefully evaluate their risk tolerance before committing to any investment.
  • Fund Manager's Expertise: Navigating funds through market fluctuations demands experience. A seasoned fund manager brings valuable knowledge to tackle market volatility and optimise returns. Investors benefit from a fund manager with a track record of managing funds effectively.

Conclusion

Balanced funds can be a valuable addition to your investment portfolio. Balanced mutual funds offer an attractive middle ground for investors, allowing them to enjoy the best of both worlds. While they may not deliver the same high returns as pure equity funds, they provide a balance between growth and stability. It is essential to assess your financial goals, risk tolerance, and investment horizon to determine if balanced funds align with your needs.

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Frequently Asked Questions

What is the asset allocation of a balanced mutual fund?

A balanced mutual fund typically maintains a mix of equity and debt instruments. The precise allocation varies, but it aims to strike a balance between potential growth and risk mitigation.

Is balanced mutual fund investment safe?

While balanced funds are designed to moderate risk by diversifying across asset classes, no investment is entirely risk-free. Investors should assess their risk tolerance and financial goals before considering balanced funds.

What is the difference between a balanced fund and a balanced advantage fund?

A balanced mutual fund maintains a predetermined mix of debt and equity investments, while a balanced advantage fund dynamically adjusts its equity exposure based on the prevailing market valuations.

Which is better equity or balanced fund?

The choice between equity and balanced funds depends on individual investor preferences and risk tolerance. Equity funds offer higher growth potential with increased risk, while balanced funds provide a mix of growth and stability.

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