As the name suggests, balanced funds are a particular type of mutual fund which invest in equity and debt in order to minimize the risk, but at the same time, they provide adequate returns to investors.

A popular categorization under balanced funds is balanced hybrid funds. Under these funds, the fund manager can allocate 40- 60% of the funds to equity and the rest to debt.

The other categories include a range from aggressive balanced funds (65-80% allocation in equity) to conservative balanced funds (10-25% allocation in equity).

How Does A Balanced Fund Work?

When an investor is confused between debt and equity, professionals generally suggest him/her to look at factors like age and current market conditions and then make a decision.

But balanced or hybrid funds provide the best of both worlds by diversifying your portfolio.

A balanced fund works on the principle of automatic rebalancing in case of bull and bear markets.

For instance, let us assume that Mr.Suresh has Rs.100 for investment. He meets a fund manager who in turn invests this Rs.100 in a balanced fund. The balanced fund invests 60% in equity and 40% in debt.

INITIAL SCENARIO
  Equity Debt Total
Amount Invested Rs.60 Rs.40 Rs.100
Allocation% 60% 40% 100%

In case of the bull market, Let us assume that the price of equity becomes Rs.80 and the price of debt becomes Rs.42.

BULL MARKET SCENARIO
  Equity Debt Total
New price Rs.80 Rs.42 Rs.122
Allocation% 65.57% 34.43% 100%

Now as we see,  the allocation percentage has deviated from what it was initially due to the rise in prices.

The fund manager will adjust the allocation to bring back the original allocation. The profit is booked in equity and the proceeds are invested in debt. Therefore, under highs, the equity stocks are sold to rebalance the portfolio.

NEW SCENARIO UNDER BULL MARKET
  Equity Debt Total
Adjusted Price Rs.73.2 Rs.48.8 Rs.122
Adjustment Rs.80 – Rs.6.8 Rs.42 + Rs.6.8 Rs.122
Allocation% 60% 40% 100%

Now, let us consider the case of bear markets.

Let us say that the price of equity becomes Rs.50 and the price of debt becomes Rs.42.

BEAR MARKET SCENARIO
  Equity Debt Total
New Price Rs.50 Rs.42 Rs.92
Allocation% 54.35% 45.65% 100%

As we see, the allocation percentage has deviated from what it was initially. The fund manager will adjust the allocation to bring back the original allocation.

This time the money moves from debt to equity to rebalance.  Equity stocks are purchased when the market is low.

NEW SCENARIO UNDER BEAR MARKET
  Equity Debt Total
Adjusted Price Rs.55.2 Rs.36.8 Rs.92
Adjustment Rs.50 + Rs.5.2 Rs.42 – Rs.5.2 Rs.92

The rebalancing feature of balanced funds provides cushioning to the capital and also ensures returns at moderate risk. The major objective is to achieve wealth appreciation in the long run and income generation in the short runs.

As we saw in the example above this is achieved through the buying and selling the securities as per the market conditions.

Structure of an Optimally Balanced Fund

The optimal balance between debt and equity depends on the choice of the investor.

Generally, a mix of 40-60% in equity and the rest in debt is preferred as it provides a good exposure in equity, along with a fixed income from debt component.

Apart from this, there are various categories of Balanced Funds which cater to the specific needs of investors.

Category Equity Component Debt Component Investment Basis
Aggressive/ Equity Oriented 65-80% 35-20% Predominantly in Equity and & Equity related instruments
Conservative/ Debt Oriented 10-25% 90-75% Predominantly in Debt instruments
Balanced 40-60% 40-60% Investing in both Equity and Debt instruments
Dynamic Asset Allocation/Balanced Advantage No limit No limit Dynamic asset allocation fund
Multi Asset Allocation Minimum:10% Minimum:10% Investment in three asset class like equity, debt and gold with at least 10% allocation in each.
Equity Savings Funds Minimum: 65% Minimum:10% Investment in equity, arbitrage and debt

Why Should You Invest in Balanced Funds?

The main reason why balanced funds are so popular is because they moderate the risk factor.  They invest in equity and debt, which gives them decent returns, as well as stability.

Also, a lot of people keep a record of the stock market and wish to invest in the stocks offered by various companies, but don’t possess the required knowledge or time.

Balanced funds are the best option for such investors as it saves on the risk of directly investing in the equity market. They not only offer low volatility and risk as compared to pure equity funds, they also provide tax benefits like equity funds.

1.Diversification

Diversification is the major objective of the fund manager under balanced funds.

Through rebalancing, he/she takes care of the asset allocation as per the market conditions. Every investor should have some of the funds parked in balanced funds.

2.Dual Objective

Balanced funds have a dual objective of growth and stability. The equity portion takes care of the growth and the debt portion ensures regular income.

3.Protection Against Market Volatility

The asset allocation under balanced funds provide protection from uneasy situations in the market.

Over the past years, balanced funds have provided stable returns even under worse market conditions. Although the returns might not be very lucrative as compared to pure equity funds, balanced funds provide a soft landing.

What Are The Key Measures of Market Volatility?

4.Option of SIPs

An investor can also invest through a Systematic Investment Plan (SIP) in balanced funds which further minimizes the risk and provides the benefit of compounding.

Balanced Funds for Retirement

The AMC takes care of day-to-day monitoring and research. They also take care of buying and selling. The investor has to put the money and leave the rest to the mutual fund company.

This is a great benefit for retired people.

Balanced funds provide an average return of 11-14%. The minimum period for investment should be 2-3 years, if you want to be on the safe side. These funds provide inflation-beating returns and keep rise in check.

Which Type of Investors Should Invest in Balanced Funds?

Generally, balanced funds are meant for investors aiming at a mix of regular income, safety of capital and capital appreciation in the long run.

If an investor is looking forward to minimizing his/her risk and still get a good exposure of equity, balanced funds is the right choice for him/her.

  • First-Time Investors

If someone is investing for the first time, he/she is majorly worried about the risk, but also wants an exposure to equity along with safety of capital.

Apart from this, he/she may have some goal in mind, say a vaction. Balanced funds cater to all these needs as they provide more predictable returns in comparison to pure equity funds.

This also helps in maintaining the capital. Balanced funds are a comfortable starting point for first time investors.

  • Risk-Averse Investors

Balanced funds are the most suitable for seasoned but conservative investors who want to reduce their risk profile but also get equity exposure and benefits from the high markets.

  • Investors With a Horizon of 3-5 Years

During declining stocks, the lower exposure of balanced funds in stocks will contain the loss and the debt component will ensure stable returns.

Thus, balanced funds provide best returns when the time period is 3-5 years.

  • Retirement Phase

A person in the retirement phase who is not willing to invest not more than 30-40% in equity should go for balanced funds as they don’t want extremely aggressive equity products in their portfolio.

Advantages of Balanced Funds?

  • Tax Benefits

The tax benefit provided by balanced funds makes it a lucrative option. As the asset allocation in equity is generally more than 65%, the balanced funds enjoy tax-free income after holding period of 1 year.

15 Ways You Can Save Tax in India

  • Automatic Rebalancing

Investing through balanced funds is much hassle-free as compared to investing individually in equity and debt. The investor does not have to keep up-to-date information about the markets. He/ she can comfortably rely on the automatic rebalancing feature of the balanced funds.

  • Allows Systematic Withdrawals

Balanced funds allow the investors to make systematic withdrawals. This is beneficial for conservative investors and for people seeking retirement.

  • Reduced Risk Due to Diversification

The USP of balanced funds is the reduction of risk by investing in debt and equity instruments. The fund manager invests in various securities which diversifies the portfolio and minimizes the risk.

The asset allocation can be optimized considering the market conditions.

  • Consistent Returns

While the returns from pure equity funds may vary, balanced funds provide a fairly consistent and stable return, provided the investor parks the funds for a significant period of time.

What are the Disadvantages of Balanced Funds?

  • Lower Returns than Equity Funds

Most balanced funds provide low returns as compared to equity funds. This comes as a disadvantage during bull phases in the market.

  • Not Completely Risk-Free

Many people perceive balanced funds as risk-free options. They are just less volatile but do have a risk factor involved.

5 Best Balanced Funds-At a Glance
Fund Name 1Y 3Y 5Y Expense Ratio Turnover Ratio Category Risk
SBI Equity Hybrid Fund - Direct - Growth 9.5% 12.38% 14.04% 1.08% 252% Hybrid
(Aggressive)
Moderately High
Reliance Equity Hybrid Fund - Direct - Growth 0.6% 10.66% 11.85% 1.11% 136% Hybrid
(Aggressive)
Moderately High
Aditya Birla Sun Life Balanced 95 Fund - Direct - Growth 2.43% 9.72% 11.82% 1.03% 29% Hybrid
(Aggressive)
Moderately High
Aditya Birla Sun Life Corporate Bond Fund - Direct - Growth 9.78% 8.22% 8.75% 0.27% NA Debt
(Corporate Bond)
Moderately Low
Franklin India Ultra Short Bond Fund - Super Institutional Plan - Direct Plan 9.76% 9% 9.3% 0.44% NA Debt
(Ultra Short Duration)
Moderate

1.SBI Equity Hybrid Fund

SBI Equity Hybrid Fund was launched on January 1st, 2013 and has a 4-star rating by Groww. This fund has an expense ratio of 1.25, which is relatively low.

Key Details

AUM ₹27,907 Cr
Top Portfolio Holdings
 HDFC Bank Ltd. State Bank of India, Kotak Mahindra Bank Ltd,
Infosys Ltd. GOI.
Minimum SIP Amount ₹500
Expense Ratio 1.32%

2.Reliance Equity Hybrid Fund – Direct

Reliance Equity Hybrid Fund was launched on 1st January 2013. This fund has been consistent and has been given a 5-star rating by Groww. It has an expense ratio of 0.72, which is brilliant and its returns since launch is 13.97%

Key Details

AUM ₹12,283 Cr
Top Portfolio Holdings
HDFC Bank Ltd, Grasim Industries Ltd, Yes Bank Ltd, Grasim Industries Ltd.
Minimum SIP Amount ₹500
Expense Ratio 1.00%

3. Aditya Birla Sun Life Balanced 95 Fund

This fund was launched on 1st, 2013. It has a 4-star rating by Groww, with an expense ratio of 0.97%. Its returns since launch is 9.17%. which is overall a decent statistic.

Key Details

AUM ₹13,141 Cr
Top Portfolio Holdings
HDFC Bank Ltd, ICICI Bank Ltd, Infosys Ltd, Larsen & Toubro Ltd
Minimum SIP Amount ₹500
Expense Ratio 1.06%

Conclusion

By providing the twin advantage of lower risk and equity exposure, balanced funds are the right choice for investors.

Moreover, the various categories under balanced fund also caters to the individual needs of the investors. Although there are some drawbacks involved, balanced funds provide regular and stable returns in the long run.

Happy Investing!

Disclaimer: The views expressed in this post are that of the author and not those of Groww