Balanced Mutual Funds

A balanced fund is a mutual fund that typically contains a component of stocks and bonds. Explore everything about the balanced mutual funds in this article.
EXPLORE FUNDS
Balanced Mutual Funds
EXPLORE FUNDS
4 mins
02-May-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.

This article covers basic details about balanced funds, how balanced funds work, features of balanced funds and more.

What are balance 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%).

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Features of balanced funds

  • Portfolio diversification: Balanced funds enable investors to diversify their portfolio by investing in a range of instruments such as equities and bonds.
  • Potential for decent returns: Balanced funds have the potential to generate substantial returns since they allocate a significant portion to equities.
  • Automatic portfolio rebalancing: Balanced funds are designed to automatically rebalance your portfolio, which can be advantageous during market instability. Fund managers sell equity holdings to maintain the fund's desired level and vice versa.

Advantages of balanced funds

Here are some advantages investing in balanced mutual 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 investment.
  5. 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.
  6. 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.
  7. Rebalancing of assets:
    • Active management: Balanced funds are actively managed by fundmanagers. 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.

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.

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.

How to invest in a balanced fund?

Step 1: Visit the Bajaj Finserv website or download the app from Google Play Store or App Store

Step 2: Navigate to 'Investments' and click on 'All Investments' on the home page

Step 3: Click on 'Mutual Funds' icon

Step 4: Click on 'Explore Funds'. You will be redirected to the mutual funds listing page

Step 5: Filter by scheme type, risk appetite, returns, etc. or choose from the top performing funds list

Step 6: All the mutual funds of the particular category will be listed, along with the minimum investment amount, annualised return, and rating

Step 7: Click on 'Invest Now'

Step 8: Enter your mobile number and sign in using the OTP

Step 9: Verify your details using your PAN, date of birth. If your KYC is not complete, then you will have to upload your address proof and record a video

Step 10: Enter your bank account details

Step 11: Upload your signature and provide some additional details to continue

Step 12: Choose and select the mutual fund that you want to invest in

Step 13: Choose whether you want to invest as SIP or lumpsum and enter the investment amount. Click on ‘Invest Now’

Step 14: Select your payment mode i.e., net banking, UPI, NEFT/ RTGS

Step 15: Once your payment is done, the investment will be complete

Your investment will start reflecting in your portfolio within 2-3 working days.

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.

Are balanced funds a good investment?

Balanced funds can be a suitable investment for those seeking a mix of growth potential and capital preservation. They offer diversification by investing in both stocks and bonds, potentially reducing overall portfolio risk. However, investors should carefully assess their risk tolerance and investment objectives before choosing balanced funds.

What is the interest rate of balanced fund?

The interest rate of a balanced fund varies depending on the performance of the underlying assets, such as stocks and bonds. Balanced funds do not offer a fixed interest rate like traditional fixed-income investments; instead, returns are determined by market fluctuations. Investors should review historical performance and consider future market expectations when evaluating potential returns.

What is the disadvantage of balanced funds?

One disadvantage of balanced funds is that they may not offer the same high returns as pure equity funds during bullish market periods. Additionally, their exposure to both stocks and bonds means they may underperform in certain market conditions. Investors should be aware of the fund's allocation strategy and consider their risk-return preferences when investing in balanced funds.

Is balanced fund tax free?

Balanced funds are not tax-free; investors may be subject to taxes on capital gains, dividends, and interest income generated by the fund. Capital gains taxes apply when investors sell their fund units at a profit, while dividends and interest income are taxed as per the individual's tax bracket. However, certain types of balanced funds, such as those investing in government securities, may offer tax benefits under specific provisions.

Who should invest in balanced mutual funds?

Balanced mutual funds are suitable for investors looking for a balanced approach to investing, combining growth potential with income generation and capital preservation. They may appeal to investors with moderate risk tolerance seeking diversification across asset classes. Individuals approaching retirement or those with shorter investment horizons may also find balanced funds attractive due to their balanced risk-return profile.

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Bajaj Finance Limited (“BFL”) is a Non-Banking Financial Company carrying the business of acceptance of deposits, providing lending solutions to Retail & Corporate customers, and is a Corporate agent of various insurance Companies. BFL is also registered with the Association of Mutual Funds in India (“AMFI”) as a distributor of third party Mutual Funds (shortly referred as ‘Mutual Funds’).

BFL does NOT:

(i) provide investment advisory services in any manner or form;

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(iii) carry customized/personalized suitability assessment;

(iv) carry independent research or analysis, including on any Mutual Fund schemes or other investments; and provide any guarantee of return on investment.


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