Simplifying Life Insurance in India

What are you looking for?

Hi There, We are working on our product and launching this soon.

Submit your details and we will notify you once we launch our Product.

Your Name

Phone Number

Date of Birth

What are you looking for?

Guaranteed Income Plan
Guaranteed Pension Plan
Money Back Plan
Single Premium Guaranteed Income Plan

Profession

{{itemType}}

Income Range

{{itemType}}

Company Name

What are Balanced Mutual Funds & How They Work?

what are balanced funds and its benefits

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, let's elaborate on the ins and outs of balanced funds.

What is a Balanced Mutual Fund?

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.

How Do Balanced 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.

What are the Types of Balanced 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.

Benefits of Balanced Mutual Funds

Balanced funds have many 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, the 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 12.5%, 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 20%.
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 is taxed according to one’s applicable tax slab. LTCG earned on redeeming units after 3 years is taxed at 20%, along with indexation benefits.

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 for investment.

How to Invest in a Balanced Fund?

Follow the below steps to start your investment journey

Step 1

Create an online account with an asset management company (AMC).

Step 2

Fill up the KYC details and furnish all the required information.

Step 3

Select the type of fund you want to invest as per your financial requirements.

Step 4

Complete the payment to begin your investment in balanced funds. You can either go for a lumpsum payment or invest in SIP.

Factors to Consider Before 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 an expense ratio. Expressed in percentage, the 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

Prospective investors must 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 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, investors must 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 maximize returns.

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

Disclaimer: The information provided on this website is for general informational purposes only and should not be construed as financial, investment, or legal advice. While we strive to provide accurate and up-to-date content, we do not guarantee the completeness, reliability, or suitability of the information for your specific needs.

We do not promote or endorse any financial product or service mentioned in these articles. Readers are advised to conduct their own research, consult with financial experts, and make informed decisions based on their unique financial circumstances. Any reliance you place on the information provided here is strictly at your own risk.

FAQs about Balanced Funds

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.

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.