Features of balanced funds
The following are the top features of balanced funds –
1. Risk mitigation
Equity markets can be unpredictable, and during periods of high volatility, the risks may exceed an investor’s comfort level. Balanced funds reduce this exposure by allocating a portion of their assets to relatively stable instruments like debt and money market securities, helping investors manage market risks more efficiently.
2. Lucrative returns
For investors with a moderate appetite for risk, balanced funds offer an attractive middle ground. While debt funds provide safety, they often yield modest returns. With balanced funds, the equity component can help generate higher returns, allowing you to enjoy the growth potential of stocks along with the relative safety of debt instruments.
3. Protection from inflation
Balanced funds combine the consistent earnings of debt investments with the higher growth potential of equities. This blend offers better chances of beating inflation, making them suitable for maintaining long-term purchasing power.
4. Suitability
Balanced funds are ideal for investors seeking a combination of stability and growth. They suit individuals aiming for moderate capital appreciation without taking on high risk. Retirees or conservative investors looking for a structured yet growth-oriented investment option may find balanced funds particularly useful for maintaining income with controlled exposure to market fluctuations.
Types of Balanced Funds
Balanced funds are categorised based on their asset allocation strategies and risk profiles. Below are the key types:
1. Equity-Oriented Balanced Funds
These funds invest at least 65% of their corpus in equities or equity-related instruments, with the remaining in debt or money market securities. They aim to provide capital appreciation along with some stability. These are more suitable for investors with moderate to high risk tolerance.
2. Debt-Oriented Balanced Funds
In this type, a larger portion—usually more than 65%—is invested in debt instruments like government securities, corporate bonds, or fixed-income products. The remaining is invested in equities to enhance return potential. These are ideal for conservative investors seeking steady income with low volatility.
3. Hybrid Aggressive Funds
These funds maintain a significant equity exposure (between 65%–80%) and are designed for growth with some risk buffer through debt exposure. They are ideal for long-term wealth creation with moderate risk.
4. Hybrid Conservative Funds
Also known as conservative hybrid funds, these invest 75%–90% in debt and the rest in equities. They prioritise capital preservation while offering limited equity-driven upside.
Each type suits a different risk appetite and investment goal choose based on your financial objectives and horizon.
How does a balanced mutual fund work?
Balanced mutual funds, also known as hybrid funds, operate by investing in a mix of equity and debt instruments to achieve a balanced approach to risk and return. These funds are structured to provide capital appreciation through equity investments while offering income stability through debt securities. The allocation between these asset classes typically adheres to a pre-defined ratio, such as 60% in equities and 40% in debt, although this can vary based on the fund's objectives.
The equity component targets long-term growth by investing in shares of companies across sectors and market capitalisations. This portion benefits from market appreciation but carries inherent risks of volatility. On the other hand, the debt component includes instruments like government bonds, corporate debentures, and treasury bills, which provide fixed returns and help cushion against market fluctuations.
Balanced mutual funds are actively managed by fund managers who continuously monitor market conditions and adjust the portfolio to optimise returns while maintaining the desired risk balance. For instance, during bullish markets, fund managers may slightly increase equity exposure, whereas in bearish phases, they may lean more towards debt.
These funds are ideal for investors seeking diversification and moderate risk. By combining equity and debt, balanced mutual funds aim to deliver stable returns over time while mitigating sharp market downturns. This makes them a suitable option for individuals looking to achieve both capital growth and steady income without the need to manage multiple investments.
Advantages of balanced funds
Here are some advantages investing in balanced mutual funds:
- Diversification: Balanced funds automatically diversify your investments across asset classes, reducing the risk associated with investing in a single asset type.
- 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.
- Professional Management: Balanced funds are actively managed by experienced fund managers who make informed decisions about asset allocation to optimise returns.
- 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 investment.
- Tax savings:
- Similar to debt funds: Balanced funds, especially those with a higher debt allocation (75% or more), are taxed similarly to debt funds. This can be beneficial for tax-conscious investors.
- Long-term capital gains: Investments held for 3 years or more in balanced funds qualify for Long-Term Capital Gains (LTCG) benefits. LTCG on balanced funds are taxed at a rate of 20% (plus applicable cess and surcharge) with the benefit of indexation.
- Indexation benefit: Indexation allows you to adjust the purchase price of your investment for inflation, potentially reducing your taxable capital gains. This can be particularly advantageous for long-term investors in balanced funds.
- Protection against inflation:
- Debt component: Balanced funds typically hold a significant portion of their assets in debt instruments like bonds and government securities. These investments offer regular interest payments, which can help hedge against inflation to some extent.
- Equity component: While the debt portion provides stability, the equity component in balanced funds offers the potential for capital appreciation over the long term. This growth can potentially outpace inflation, helping to preserve the purchasing power of your investment.
- Rebalancing of assets:
- Active management: Balanced funds are actively managed by fund managers. These managers strategically allocate assets between equity and debt, aiming to maintain a target asset allocation.
- Maintaining balance: Over time, market movements can cause the weightings of equity and debt in the fund to drift from the target ratio.
- Periodic rebalancing: Fund managers periodically rebalance the portfolio by buying or selling assets to restore the desired asset allocation. This helps maintain the fund's risk profile and investment objective.
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.
How should you invest in a balanced mutual fund
Assess your risk appetite: Balanced funds suit moderate-risk investors looking for a mix of growth and stability.
Choose between equity or debt-oriented: Depending on your financial goals, opt for an equity-heavy or debt-heavy balanced fund.
Invest through SIP or lumpsum: Start small with SIPs or invest a lumpsum based on your market outlook and liquidity.
Why should you invest in a balanced mutual fund
Balanced asset allocation: These funds invest in both equity and debt instruments, helping maintain a healthy mix of risk and return.
Lower volatility: The debt portion cushions the equity exposure, making these funds less volatile compared to pure equity funds.
Diversification benefits: You gain exposure to different asset classes through a single fund, reducing the risk of concentrated losses.
Regular income: The debt component may offer periodic interest payouts, making these funds suitable for conservative or retired investors.
Long-term wealth creation: The equity part drives capital appreciation, ideal for long-term goals like retirement or children’s education.
Tax-efficient structure: Equity-oriented balanced funds may enjoy equity taxation benefits, offering better post-tax returns.
Ease of management: Fund managers handle rebalancing, so you don’t need to track the market closely.
Suitable for first-time investors: Balanced funds are great for beginners due to their inherent diversification and moderate risk.
Taxation of balanced funds
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. 1.25 lakh. LTCG exceeding Rs. 1.25 lakh is taxed at 12.5%, 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 20%. 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.
Disadvantages of balanced funds
- Moderate returns: Balanced funds may not generate returns as high as pure equity funds during bull markets, limiting the growth potential.
- Fees: Balanced funds typically come with management fees like almost other types of mutual funds, which can reduce the overall returns.
- Interest rate risk: The debt component of balanced funds is exposed to interest rate fluctuations, which can impact the returns from the debt portion.
- Lack of customisation: Balanced funds have predetermined asset allocation ratios that may not align with your specific risk tolerance or financial goals.
List of balanced funds in India sorted by returns
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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