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All You Need to Know About Balanced Funds

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Financial experts have always advised investors to own a diversified portfolio that has investments across various asset classes and securities. Diversification aids in mitigating the risk associated with different investments; however, in their quest to diversify their portfolio, investors often end up making low-yield or risky investments. Wouldn’t it be amazing if there was a method that allowed investors to invest in equity and debt instruments both through a single fund? Well, there is, namely balanced mutual funds.

This article will cover everything you need to know about balanced funds before you consider investing in them.

What is a Balanced Fund or Hybrid Fund?

Balanced funds, also known as hybrid funds, are a class of mutual funds that contain a bond (debt) component and a stock (equity) component in a specific ratio in a single portfolio. These mutual funds help investors diversify their portfolio by investing in asset classes such as equity and debt. Generally, hybrid mutual funds stick to a relatively fixed mix of bonds and stocks.

Understanding Balanced mutual funds

Balanced funds are a one-stop investment option that offer exposure to both equity and debt securities. The main intention of these mutual funds is to balance the risk-reward ratio and optimise the returns on the mutual fund investment. Thus, balanced or hybrid mutual funds are  ideal for investors who are looking for capital appreciation at minimum risk.

Features of Balanced funds

Following are some of the top features of balanced funds in India:

  1. Investing in balanced funds offers investors the chance to diversify their portfolio as these funds invest in a variety of instruments across equity and debt assets.
  2. Balanced mutual funds invest in debt and equity instruments in a composed ratio, thereby minimising an investor’s risk exposure.
  3. Investments made in hybrid funds permit the fund manager to adjust the fund’s portfolio according to market conditions.
  4. Balanced mutual funds carry lower risk than pure equity mutual funds.
  5. These mutual funds are designed to automatically re-balance an investor’s portfolio in the event of extreme market fluctuations. Re-balancing even allows fund managers to sell equity mutual funds to maintain the fund’s performance and vice versa.

What are Types of balanced funds

Balanced funds can be broadly classified into two types:

1. Equity-oriented balanced funds

These hybrid funds invest at least 65% of their corpus in equity and equity-related securities. The remaining corpus is invested in debt instruments or even money market investments to provide stability during volatile market conditions.

2. Debt-oriented balanced funds

These hybrid funds invest at least 65% of their total corpus in debt securities. The debt component of the scheme includes investments in fixed-income instruments such as treasury bills, debentures, bonds, government securities, and so on. Some part of the fund could also be invested in cash and cash equivalents to give it a liquid component.

How are Balanced Funds Taxed?

a. Tax on equity-oriented hybrid funds

Balanced mutual funds with higher exposure to equity instruments are treated as equity funds for taxation. As such, STCG (short-term capital gains) are taxed at 15%. For holding periods of more than one year, LTCG (long-term capital gains) are taxed at 10% for gains above Rs. 1 lac as LTCG up to Rs. 1 lac are exempt from tax.

b. Tax on debt-oriented hybrid funds

Balanced mutual funds with higher exposure to debt instruments are treated as debt funds for taxation. Capital gains from debt funds are not eligible for tax exemption. For investments held less than three years, the STCG are taxed as per the individual’s income tax slab. However, if the holding period is more than three years, LTCG are taxed at 20% with indexation benefits.

Advantages of Balanced Funds or Hybrid Funds

Following are some of the benefits of balanced mutual funds:

1. Re-balancing of funds

There are times when equity markets are overvalued in comparison to the debt markets and vice versa. In such situations, the fund manager has the liberty to move across the two major asset classes (equity and debt) and balance the fund’s performance against market fluctuations.

2. Risk reduction

Investments in pure equity funds attract significant risk as the equity market can slump greatly in extreme situations. Thus, the debt component in balanced funds helps investors to balance out the risk posed by the equity component.

3. Portfolio diversification

Hybrid funds offer diversification in the form of a single mutual fund. This allows fund managers to maintain a diversified portfolio with investments across various asset classes, i.e. equity, debt, and money-market instruments. Diversification across asset classes serves the dual purpose of capital appreciation and risk reduction.

4. Protection from inflation

Owing to their unique asset allocation, wherein the debt component offers regular income while the equity component aims to provide better returns, balanced funds act as a hedge against inflation.

Who should invest in Hybrid Mutual Funds or Balanced Funds?

These mutual funds are ideal for those investors who seek income, , and medium capital appreciation from their mutual fund investments. Those with low-risk tolerance, such as retirees, can invest in these mutual funds to balance out the risks and returns.

Generally, equity mutual funds follow variable asset allocation according to the market conditions. Hybrid funds have the edge over equity funds as they strictly adhere to their line of asset allocation rules and never exceed the mandated exposure norms. This is the reason why hybrid funds generate higher returns from their equity component during bullish markets.

How to invest in Balanced funds or Hybrid Funds

Are you wondering how to buy balanced funds? Today, you can easily buy balanced funds from the comfort of your home. Just follow these steps to start your investment journey in hybrid funds:

  1. Open an online account with an AMC (Asset Management Company)
  2. Complete all your KYC formalities (if you have not done it yet)
  3. Enter the necessary details, as required
  4. Identify the fund(s) you wish to invest in based on your financial objectives and goals
  5. Select the fund and transfer the amount
  6. You can generate a standing instruction with your bank in case you want to invest via SIP.

Balanced or hybrid funds have gained immense popularity among investors in the past few years as they provide the best of both worlds. If you are new to the investing world, opting for balanced funds can be the starting point of your mutual fund investment journey. Happy Investing!