Balanced funds, which are a kind of hybrid funds, help an investor diversify their portfolio through investment in varied asset classes. It often consists of a bond (debt) and a stock (equity) component.
List of Balanced Mutual Funds
- 360 ONE Balanced Hybrid Fund Direct Growth
- WhiteOak Capital Balanced Hybrid Fund Direct Growth
What are Balanced Funds?
Balanced funds are financial instruments that invest in a mixture of both debt and equity segments in specific ratios. These funds enable investors to diversify their mutual fund-based portfolios. Since they maintain a balance between both debt and equity segments, they provide the best risk-reward balance and help to maximize the returns on investment.
Balanced mutual funds are mostly equity-oriented and take up about 40-60% of the fund's portfolio. The biggest advantage of investing in these funds is that they ensure capital appreciation and provide a safety net against potential risks.
These funds are thus mostly oriented toward investors seeking a mixture of capital appreciation, income, and low-risk investment options.
Features of a Balanced Fund
The major characteristics of this fund are as follows:
Diversification Fund
Investing in balanced funds allows investors to diversify their portfolios by investing in a number of securities that span equities and debt assets.
Frequently Adjusted Funds
Hybrid fund investments allow the fund manager to modify the fund's portfolio in response to market conditions.
Rebalance
In the event of substantial market swings, these mutual funds are designed to automatically rebalance an investor's portfolio. Fund managers can even sell stock mutual funds to maintain the fund's success and vice versa.
Low Risks
Balanced mutual funds are less risky than pure equity funds.
How Does a Balanced Mutual Fund Work
There are two components of this mutual fund that serve two different purposes. The equity portion of this investment scheme aids in the prevention of the erosion of investors' purchasing power. Since they mostly invest in stocks, they require a relatively smaller quantum of capital investment.
The prices of equity funds depend on the net asset value of a fund minus its liabilities. Mostly, the equity holding portion of this mutual fund inclines towards the larger, dividend-paying companies.
To balance out the risks presented by the equity funds, the balanced mutual funds invest the rest of their corpus into debt-oriented schemes.
The debt segment of the scheme mostly involves investing in bonds and other debt securities. Even though they provide low returns compared to equity funds, they help to serve two purposes. Firstly, they help to create an income stream. Secondly, they help to neutralize the volatility of the investor's portfolio.
They are much more secure than equity investments and, as a result, help to minimize the vulnerability of investments. Typically, this fund is the best option for investors with a low-risk tolerance who are looking for investment options that make up for growth outpacing inflation; they also generate income that helps to supplement investors' financial needs.
They help individuals with no source of income to create a steady revenue source to accumulate enough capital to pay for their necessities.
How Should You Invest in a Balanced Mutual Fund
You can invest in Balanced funds through a fund house-
- Sign up with them online.
- Determine the fund and amount to invest.
- Transfer funds from your bank account.
- Monitor the fund's performance.
Alternatively, you can also choose Groww to start investing in your balance funds seamlessly through online mode.
Why Should You Invest a Balanced Mutual Fund
You can invest in these funds for the benefits mentioned below:
Tax Benefits
With this investment scheme, fund managers have the option to migrate between debt and equity without presenting investors with a tax liability. If investors were to move between the funds themselves, they would be subject to taxation under capital gains. This could have resulted in a high taxation amount of about 30% if investors chose to move out from debt funds within 36 months of investing in them.
Rebalancing of Funds
There are times when the equity market is overvalued in comparison to the debt market and vice versa. In this case, with hybrid funds, investors can move between the two asset classes more.
Risk Reduction
Investing solely in equity funds can be extremely risky. In hybrid funds, the debt instruments help to balance out the risk presented by equity funds.
Hedge Against Inflation
Since a portion of hybrid funds consists of debt assets, they can act as an inflation hedge. Therefore, the diversity in one's portfolio makes for a cushion against the sustained rise in market prices.
Portfolio Diversification
These funds are excellent options when it comes to diversifying one's investment portfolio. Since these funds help to maximize returns and yet provide a safety net against market-related risks, they present investors with the perfect option to limit their investment liabilities.
Taxation Rules of Balanced Mutual Funds
The taxations of the top balanced funds are as follows –
Equity Oriented Funds
Mutual funds with an equity-based investment ratio of more than 65% fall in the class of equity assets for the purpose of taxation. Thus, these funds are liable for 15% taxation on their short-term capital gains or STCG. Here, STCG includes all the profits booked with a year of the equity-related ratio.
If investors hold the funds for over a period of 12 months, then they will be taxed at the rate of 10% on the long-term capital gains or LTCG. However, this tax regime is applicable only if the gains exceed Rs. 1 Lakh in total.
Debt Oriented Funds
Hybrid funds that are more debt-oriented are taxed as the regime for debt assets. Here, short-term capital gains are taxed at 20% with benefits from indexation. Also, taxation on long-term capital gains is taken only when investors hold these funds for more than 36 months.
Therefore, as far as tax implications are considered, equity-oriented hybrid funds hold advantages other than debt-oriented ones.
FAQs
Q1. What is balanced fund meaning?
A balanced fund (hybrid fund) is a mutual fund that normally includes both stocks and bonds. Balanced funds often adhere to a fixed asset allocation of stocks as well as bonds, such as 70% equities and 30% bonds.
Q2. Who can invest in balanced funds?
These funds suit investors with a moderate risk tolerance who want to obtain inflation-beating returns and protect their retirement savings. It is also suitable for Long-term investors in higher tax brackets who are considering allocating a part of their portfolio to these funds.
Q3. Do balanced funds give good returns?
While balance funds can be a safer way to invest in the stock market, security comes at a cost. Most balanced funds underperform equity mutual funds, especially during bull markets, because a portion of their investment is still dedicated to debt funds.
Q4. What are the benefits of investing in balanced funds?
The most essential benefit of this fund is its low risks.
Q5. What should be the investment horizon for a balanced fund?
These funds perform well in the long term, hence, one should stay invested in them for at least 4-5 years.
Disclaimer - Mutual Fund investments are subject to market risks; read all scheme-related documents carefully.
