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%).