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    Balanced Mutual Funds: Types, Advantages & Tax Implications

    balanced fund
    (Source: economictimes)

    A balanced fund is a type of hybrid fund that is apt for individuals aiming to diversify their portfolios. This new form of the hybrid fund was introduced in 2017 after SEBI re-categorised mutual fund schemes.

    On that note, allow us to elaborate on the ins and outs of balanced funds.

    What Is the Meaning of Balanced Mutual Funds?

    A balanced fund is a type of mutual fund whose portfolio includes debt and equity components in a specified ratio. As a result, balanced mutual funds facilitate income as well as capital appreciation, alongside lowering the potential risk of investment. Moreover, this helps investors with maximum returns from both segments.

    In brief, a balanced fund is a comprehensive investment option providing exposure to equity and debt securities. The primary purpose of this fund is to maintain the risk-reward ratio stability.

    Types of Balanced Mutual Funds

     

    A balanced fund has the following types-

    Types of Balanced Mutual Funds

    Details

    Equity-Based Balanced Fund

    This hybrid fund invests 65% of its corpus in equity and equity-oriented securities. The remaining portion is invested in debt instruments.

    Debt-Based Balanced Fund

    This hybrid fund invests 65% of its corpus in debt securities. The debt security of this scheme comprises fixed-income instruments, such as debentures, treasury bills, bonds, government securities, etc.

    How Do Balanced Mutual Funds Work?

    Balanced funds have the option to invest 40-60% of their corpus in debt and 40-60% in equity. For instance, a fund manager, bearish on stocks, can invest 40% or 50% of the corpus in stocks and the remaining in debt. Likewise, if a fund manager is bullish on equity, he/she can invest 60% in stocks and the remaining 40% in debt.

    So, based on their outlook, fund managers have the freedom to shift between debt and equity, which allows them to realign the portfolio.

    Moreover, a mixed portfolio of debt and equity makes balanced mutual fund schemes comparatively safer than pure equity funds. In addition, the debt portion of their portfolios ensures stability, while the equity part helps investors earn extra returns.

    Benefits of Balanced Mutual Funds

    Balanced funds have a number of features and benefits that can be attractive to potential investors, such as the following:

    1. Rebalancing of Funds

    There may be instances wherein the equity market is overvalued compared to the debt market and vice versa. In such circumstances, a fund manager can navigate the two asset classes – debt and equity. As a result, he/she effectively balances the fund’s performance and tackles market fluctuations.

    2. Lowers Risk

    Equity markets are highly volatile. Therefore, investments in pure equity funds involve significant risk. In this regard, the debt component of a balanced fund allows one to balance out the associated risk of investment posed by its equity component.

    3. Diversifies Investment Portfolio

    Balanced mutual fund investment is an ideal vehicle to attain portfolio diversification. Moreover, this diversification ensures the dual benefit of risk reduction as well as capital appreciation.

    4. Protection from Inflation

    Given their unique allocation of assets, equity component of balanced funds offer higher returns while their debt portion extends regular income. As a result, these mutual funds serve as a hedge against inflation.

    5. Tax Implications

    Capital gains on balanced funds are taxed depending on the equity-debt orientation of a fund in this manner:

    • Equity-Based Balanced Funds: These funds are taxed like pure equity funds. So, 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 ₹1 lakh. LTCG exceeding ₹1 lakh is taxed at 10%, excluding the indexation benefit. On the other hand, 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: These mutual funds are taxed like debt funds. Therefore, in the case of investments held for less than 3 years, STCG 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.

    What Are the Returns for a Balanced Fund?

     

    To gain a fundamental idea of their returns, the table below highlights the best balanced funds in 2021 and their past returns. Here, take a look:

    [1] [2]

    Mutual Fund

    3-Year Returns

    5-Year Returns

    DSP Equity & Bond Fund

    23.82%

    15.22%

    Kotak Equity Hybrid Fund

    23.24%

    15.03

    Axis Equity Hybrid Fund

    22.31%

    NA

    ICICI Prudential Equity & Debt Fund

    22.47%

    16.95%

    Mirae Asset Hybrid-Equity Fund

    21.43%

    16.89%

    *data as on 22 October 2021

    Who Should Invest in Balanced Funds?

    These funds are meant for investors who are looking to earn an income along with a medium capital appreciation. If you have a low risk appetite and want exposure to both equity and debt funds, a balanced mutual fund can be considered to invest in.

    How to Invest in a Balanced Fund?

    Follow the below steps to start your investment journey:

    1. Create an online account with an asset management company (AMC).
    2. Fill up the KYC details and furnish all the required information.
    3. Select the type of fund you want to invest as per your financial requirements.
    4. Complete the payment to begin your investment in balanced funds. You can either go for a lumpsum payment or make an investment via SIP.

    Things to Consider When Investing in a Balanced Fund

    Before investing in balanced mutual funds, one must take a few factors in consideration, such as the following:

    1. Expense Ratio

    Like any other mutual fund, hybrid or balanced funds levy expense ratio. Expressed in percentage, expense ratio is the fee charged by an asset management company for its services. Naturally, a high expense ratio increases the cost of investment.

    2. Past Performance

    It is imperative for prospective investors to evaluate the past performance of a balanced fund before investing in it. That said, one must note here that although it is an important factor, past performance is not an indicator of future returns. Therefore, it is wise to take a fund’s past performance into account in order to have a rough idea of its probable returns.

    3. Risk

    Balanced funds are considered to be less risky than other mutual funds, like equity funds. However, as investors may already know, all mutual fund investments involve some risk. Therefore, it is critical for investors to gauge their tolerance for risk before investing.

    4. Experience of the Fund Manager

    It takes years for one to learn the effective navigation of funds through market fluctuations. So, a fund manager with several years of experience in the industry will have the necessary knowledge and know-how to tackle market volatility and maximise returns.

    Balanced funds serve the dual purpose of risk reduction and wealth creation, which make them a preferred investment vehicle for investors. However, prior to investing in a balanced fund, it is best to ascertain your financial goals, investment horizon, and risk appetite.

    Frequently Asked Questions

    Is balanced mutual fund investment safe?

    Balanced funds involve lesser risk compared to pure equity mutual funds. Moreover, an investment in balanced mutual funds is ideal for novice or risk-averse investors.

    Balanced funds involve lesser risk compared to pure equity mutual funds. Moreover, an investment in balanced mutual funds is ideal for novice or risk-averse investors.

    What is the difference between a balanced fund and a balanced advantage fund?

    A balanced mutual fund has a pre-decided ratio of debt and equity investments. On the other hand, a balanced advantage fund adjusts its equity exposure depending on the overall market valuations.

    A balanced mutual fund has a pre-decided ratio of debt and equity investments. On the other hand, a balanced advantage fund adjusts its equity exposure depending on the overall market valuations.

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    Disclaimer: This information is added only for informative purposes and collected from different sources across the Internet. Digit Insurance is not promoting or recommending anything here. Please verify the information before making any decisions.

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    4. What is a Balanced Fund

    Last updated: 2023-03-23

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