What is a Balanced Fund?
Balanced funds are financial instruments that invest in a mixture of both debt and equity segments in specific ratios. Also known as hybrid funds, these funds enable investors to diversify their mutual fund based portfolio. Since they maintain a balance between both debt and equity segments, they provide the best risk-reward balance and help to maximise the returns on investment.
Balanced mutual funds are mostly equity-oriented and take up about 40-60% of the fund’s portfolio. The biggest advantage of investing in these funds is that they ensure capital appreciation and provide a safety net against potential risks.
These funds are thus mostly oriented towards investors seeking a mixture of capital appreciation, income as well as low-risk investment options.
What is the Purpose of Balanced Mutual Fund?
There are two components of this mutual fund that serve two different purposes. The equity portion of this investment scheme aids in the prevention of the erosion of investor’s purchasing power. Since they mostly invest in stocks, they require a relatively smaller quantum of capital investment.
The prices of equity funds depend on the Net Asset Value of a fund less its liabilities. Mostly, the equity holding portion of this mutual fund inclines towards the larger, dividend-paying companies.
To balance out the risks presented by the equity funds, the balanced mutual funds invest the rest of its corpus into debt oriented schemes.
The debt segment of the scheme mostly involves investing in bonds and other debt securities. Even though they provide low returns compared to equity funds, they help to serve two purposes. Firstly, they help to create an income stream. Secondly, they help to neutralise the volatility of the investor’s portfolio.
They are much more secure than equity investments and as a result, help to minimise the vulnerability of investments. Typically, this fund is the best option for investors with a low-risk tolerance who are looking for investment options that make up for growth outpacing inflation; they also generate income that helps to supplement investor’s financial needs.
They help individuals with no source of income to create a steady revenue source to accumulate enough capital to pay for their necessities.
The tax implications of the top balanced funds are as follows –
- For equity-oriented funds
The mutual funds with an equity-based investment ratio of more than 65% fall under the class of equity assets for the purpose of taxation. Thus, these funds are liable for 15% taxation on its short-term capital gains or STCG. Here, STCG includes all the profits booked with a year of the equity-related ratio.
If investors hold the funds for over a period of 12 months, then they will be taxed at the rate of 10% on the long term capital gains or LTCG. However, this tax regime is applicable only if the gains exceed Rs. 1 Lakh in total.
- For debt-oriented funds
Hybrid funds that are more debt-oriented are taxed under the regime for debt assets. Here, short term capital gains are taxed at 20% with benefits from indexation. Also, taxation on long term capital gains is considered only when investors hold these funds for more than 36 months.
Therefore, as far as tax implications are considered, equity-oriented hybrid funds hold advantages other the debt-oriented ones.
Who should Invest in Balanced Funds?
These funds are mostly meant for those who seek safety, income and medium capital appreciation from their investment. Those with low-risk appetite can invest in these hybrid funds to balance out the benefits and risks of the investment market.
Usually, equity funds follow variable asset allocation rules based on market conditions. But the advantage with hybrid funds is that they strictly adhere to their line of orientation. They never exceed the 65% limit as mandated by the investment guidelines.
That is why, during bull run of market, these top balanced funds generate higher returns from its equity component. Again, during the bear run, the erosion of fund returns is also prevented due to its debt component.
Major Advantages of Balanced Funds
The best balanced funds 2019 present several advantages for investors. For instance,
- Taxation benefits
With this investment scheme, fund managers have the option to migrate between debt and equity without presenting investors with a tax liability. If investors were to move between the funds themselves, they would be subject to taxation under capital gains. This could have resulted in a high taxation amount of about 30% if investors chose to move out from debt funds within 36 months of investing in it.
- Risk reduction
Investing solely in equity funds can be extremely risky. For instance, during the financial crisis of 2008, there was a 50% decline in the NIFTY index from 6000 levels to 2500 levels, leading equity fund investors to incur sizeable losses. Thus, in hybrid funds, the debt instruments help to balance out the risk presented by equity funds.
- Re-balancing of funds
There are times when the equity market is overvalued in comparison to the debt market and vice versa. In this case, with hybrid funds, investors can more between the two asset classes.
- Diversification of investment portfolio
These funds are excellent options when it comes to diversifying one’s investment portfolio. Since these funds help to maximise returns and yet provide a safety net against market-related risks, they present investors with the perfect option to limit their investment liabilities.
- Protection from inflation
Since a portion of hybrid funds consists of debt assets, they can act as an inflation hedge. Especially if the investment includes international bonds, they can help to protect investors from inflation by giving them access to countries that have not been affected by it. Therefore, the diversity in one’s portfolio makes for a cushion against the sustained rise in market prices.
Apart from these, these funds also allow investors to withdraw money from the funds periodically without any alteration to asset allocation. Thus, these are low investment schemes that can maximise the returns on investment while protecting investors against several market risks.