Balanced Funds: Why, when, and who?

When it comes to money, usually investors have to choose between a pair of factors like risk or return; safety or growth; equity or debt, so on and so forth. However one may not always want to choose only one of the two. For example, when one invests, they would want the benefit of safety as well as good returns. One wouldn’t want to compromise on either. So in the world where one has to necessarily choose between options, is there a way to not compromise on safety and returns for an investment portfolio?

The answer lies in opting for a Balanced Fund.

What is a Balanced Fund?

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A Mutual Fund is an investment vehicle that collects funds from investors and invests this money across various asset classes. The kind of asset a Fund invests in depends on its type. Funds which invest majority in Equities are called Equity Funds and the ones investing primarily in debt are called debt funds.   And then there are Balanced Funds that invest in both Equity and Debt.

One’s investment in a Balanced Fund has exposure to both Equity and Debt in a pre-fixed ratio. For example, a Fund may choose to invest 65% of its assets in Equity and the remaining 35% in Debt. So, the fund combines the strength of both asset classes.

Depending on the asset class they invest in, balanced Funds are categorised as:

  1. Equity-oriented Funds: In this case, a major portion of your investment gets invested into Equity. As a result, such Funds have a greater potential to offer high returns. Of course, the risk component also increases. However, the risk exposure is usually lower than a pure Equity Fund.
  2. Debt-oriented Funds: Debt instruments form the major component of these types of balanced funds. The capital invested is relatively safe but the returns generated are low.

Benefit from the inherent diversification

The biggest benefit of a Balanced Fund is its dual nature. The Equity component of a Balanced Fund helps deliver returns, while the Debt component offers protection against volatility. The exposure to more than one asset class in Balanced Funds helps diversify the overall portfolio.

As a result, one will find Balanced Funds deliver during vexing market conditions. Every time the equity market goes through a correction, the Debt component of the Fund comes to the rescue. It then performs better than pure equity funds even when you find the equity markets in red.

So, who should invest?

Traditionally, Balanced Funds act as a good entry point for Equity investments. They form the link between a Debt Fund and an Equity Fund. Through such Balanced Funds, you can invest your money a little in Equity without letting go of the safety of Debt instruments. It can be your first step in the world of Equity investment. Once you have become comfortable with the Equity component of Balanced Funds, you can increase your Equity exposure by diversifying to other equity funds.

Also, you can consider Balanced Funds if you do not want to take as much risk as with Equity Funds. This way, you can benefit from the wealth creation potential of Equity without investing 100% in it.

The bottom line: If you have any of these questions in mind, you may want to consider balanced funds:

  • Are you worried about your investments in equities?
  • Has your risk appetite reduced due to a financial commitment?
  • Is your debt investment not generating enough returns?
  • Do you want to move more exposure to equity?
  • Are you looking for tax benefits on your investment portfolio?

If your answers are yes, then Balanced Funds could be your solution.

Additionally, one can also look at the other benefits mentioned below:

For starters, Balanced Funds are quite tax-efficient

Equity-oriented Balanced Funds attract the same taxation law as an investment in Equity. This is because they invest nearly 65% of their portfolio in stocks. And capital gains from Equity-oriented Balanced Funds are exempt from tax if you hold for a period longer than 1 year.

Even Debt-oriented Balanced Funds are tax efficient. Funds that invest over 65% in Debt are considered a Debt instrument for tax purposes. And Debt investments attract a Long-term Capital Gains Tax of 10% or 20% if you hold them for over three years. The dual rate system is because of indexation.

With indexation, you can adjust your profits for inflation. This reduces the actual profit value for tax purposes. You can then pay 20% tax on it. Alternatively, you can pay a flat rate of 10% on the profits if you do not wish to opt for indexation. This is still better than the Income Tax slab rate you pay on your Fixed Deposit interests (over Rs 10,000).

Disclaimer: Subject to current Tax laws. For personal tax implication investors are requested to consult their tax advisors before investing.

Use professional portfolio management

The biggest question investors often ask is: When to sell and book profits?

With a Balanced Fund, this question is answered. A Fund manager rebalances the Fund portfolio regularly. For example, let’s assume that the intended allocation of equity in the balanced fund is 65%. If the value of Equity increases to 80% of the Fund’s asset value, then the Fund manager would sell some of the Equity. This is because the Fund manager has to—at all times—ensures the Fund’s asset proportion is as per the mandate. This is as per rules by the market regulator. So, this helps solve the question of ‘When to redeem and when to book profits?’

You can get a secondary income

In the above example, the Fund manager had to sell off some Equity investments. The Fund could then distribute this amount to investors as a Dividend or Bonus.

Even the Debt instruments invested in pay interests at a set frequency i.e. every month, quarter or year. This money can then be distributed to investors too.

But, remember: Dividends are paid at the discretion of the AMC and only if the fund generates a distributable surplus. Also, with every dividend paid, the net asset value (NAV) of the Fund reduces.

Positive outlook

India’s economy is poised to grow. This makes the outlook bright for Equity investments. After all, as the economy grows, companies—and thus investors—benefit. At the same time, inflation is steady. And with it, interest rates are lower than earlier. Debt investments could benefit from a fall in interest rates.

So, this is the right time to invest in both Equity and Debt. And what better way to do than through Balanced Funds!

Mutual Fund Investments are subject to market risks, read all Scheme related documents carefully.

This is a partnered post.


Published Date: Apr 17, 2017 02:36 pm | Updated Date: Apr 18, 2017 11:27 am


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