What are balanced Funds?

Balanced Funds are a kind of mutual fund scheme where funds are invested in equities as well as debt. Generally, the ideal ratio is 65% in equities and 35% in debt

Why Balanced Funds?

It is ideal for someone looking to invest with moderate risk where you get the benefits of equities as well as debt. Equities offer capital appreciation while debt securities offer regular income and have a lower risk when compared with equities. As they invest in various securities across sectors as well as different asset classes. It reduces the risk associated with individual securities.

How to Choose the right Balanced Fund?

Investment Objective

The first parameter that you should be looking is your investment objective i.e. what do you purpose from the investment like retirement, child’s education or anything else? This will help you in quantifying the amount of risk you can take. Another checkpoint should be the Investment horizon i.e. what is the time duration for which you plan to stay invested. There are two types of balanced Schemes- Equity oriented and Debt oriented. Equity Oriented Schemes have equities and debt in a ratio of 65:35. While debt oriented Schemes have debt and equities in a ratio of 65:35.

Taxation benefits

It is important to realize that capital gains from equity and debt oriented funds are treated differently for taxation. Equity oriented mutual funds are treated as equity funds for tax purposes, hence, call for tax-free returns if held for more than one year. The capital gain is taxed at 15% if the money is redeemed before 1 year. Debt oriented balanced funds are subject to a tax rate of 20% on long-term capital gains(arising post 3 years).

Fund History & Manager

Always check the track record of the fund manager before investing in any scheme because it is essential to know whom you are entrusting your money with. How long has he/she been managing the fund, how long has the fund itself been in operation and other questions pertaining to the credibility of the fund’s manager?

It is possible that the mutual fund scheme has been generating higher returns but has recently witnessed a change in the fund manager, thereby, raising a question on the future performance.

Asset Allocation

The next round of elimination entails analysing the asset allocation by the fund. Asset allocation means the distribution of the funds across various class or sector as well as different type of companies like Large-Cap, Mid-Cap and Small-Cap. Large cap stocks are less volatile and less risky but offer low returns as compared to mid cap and small cap stocks.

The debt component of the mutual fund should ideally comprise of risk-free government securities and highly rated corporate debt securities.

Quantitative Analysis

Last but not the least, there should be a quantitative analysis wherein we look at the Assets Under Management, Turnover Ratio, Expense Ratio, Alpha and the past returns (ideally last 1, 3 and 5 years). It is essential to compare the performance of a fund scheme vis-à-vis others in the same category rather than just looking at the numbers in silos.

Assets Under Management

AUM refers to the total market value of the assets that the mutual fund is managing on the behalf of its investors. A larger value of assets (at least greater than 100 crores) depicts the confidence level of investors in the fund. However, a huge AUM is a red flag

Turnover Ratio

Turnover Ratio typically depicts the change in portfolio holdings over time. Usually, funds with a lower ratio are preferred. However, if the reallocation prevents downside from likely underperformance in some sectors, it may be in good taste. It is therefore wise to analyse the sectors first.

Expense Ratio

Expense ratio measures the cost incurred in managing the mutual fund. A regular plan is likely to have a higher ratio than a direct plan. Needless to say, a higher expense ratio eats up into the profits generated from the scheme and is an indicator of operational inefficiencies of a fund house. Hence, a lower expense ratio is preferable.

Alpha

Alpha is an indicator of risk-adjusted return and the ability of the portfolio manager. It denotes the excess returns that a portfolio generates over and above the benchmark index.

ICICI Prudential Balanced Fund has a high AUM which is a red flag and should be avoided.

Our Pick for the best Balanced Funds

 

The Following portfolio consists of three balanced funds which have given healthy returns in the past. There are three balanced funds in the portfolio.

Check out this portfolio