Balanced Mutual Funds Portfolios contain a relative mix of Stocks, Bonds and sometimes Money Market instruments, within them. The objective is to ensure capital appreciation as well as seeking to minimize any potential risks. It is a type of hybrid fund that diversifies its corpus among two or more asset classes. Because Balanced Mutual Funds investments having both Equity and Debt contents, the risk of the investor gets significantly lowered.
Another name for a Balanced Mutual Fund is an Asset Allocation Fund.
Balanced Mutual Funds
SEBI governs the amount, a balanced mutual fund can invest in each asset class. So it must remain within a set minimum and maximum value. In India, usually, the Balanced Mutual Funds invest 50%-70% of their portfolio in stocks and the remainder in bonds and other debt instruments.
Due to this reason, they are a suitable option to select, in case you are investing in mutual funds for the first time. Balanced Mutual Funds are intended for investors looking for a mixture of safety, income, and a modest capital appreciation.
Under Balanced Funds, the fund manager keeps actively adjusting the portfolio according to the market conditions. Though these funds carry lower risk, that doesn’t mean that their Returns are guaranteed. They still depend on the equity market conditions, and fund managers decisions, so they cannot be relied upon for a regular income.
Benefits of investing in Balanced Funds
The holdings of Balanced Mutual Funds are strategically balanced between equity and debt with their objective of balanced growth as well as income. The combination of debt and equity components makes them less vulnerable to market volatility. The fund manager analyzes and selects from the vast variety of available equity, bonds, etc. So the investor has no need to go through the trouble, making the forbidding task much easier.
The equity portion of the fund can generate capital appreciation, while debt components shield the investment from volatility.
- Risk Reduction: Investing in purely equity funds is highly risky. In extreme conditions, the whole market can fall grandly. Remember the financial crisis of 2008 when the NIFTY saw a decline of more than 50%. Dropping from 6,000 point level to 2,500 point level. Compared to equity, the debt markets are less risky because the instruments have fixed returns. But, of course, the returns are much lower in comparison, during the long-term.
- Tax Efficiency: The contents of the portfolio keeps getting relocated by the respective fund manager. Sometimes, even moving between equity and debt. This doesn’t incur a tax liability for investors. On the other hand, if you yourself were managing your money. re-allocating it between these funds, gains on your investments would have been subject to capital gains tax. This tax could get as high as 30% if you had moved out of a debt fund within 3 years of the purchase.
- Re-allocation: The fund manager has the freedom to move between debt market & equity. And given his understanding of the market ups and downs, he would be able to quickly respond to over or undervaluation in one market. With this flexibility criteria, the balanced Mutual Funds are able to avoid market volatility.
Disadvantages of Balanced Funds
The benefits of balanced funds can also have a downside to them.
When you don’t have control over the allocation of your money, the decisions by someone else, though apt for a majority of the investor, may not always suit you. You may want to keep securities earning higher returns in tax-advantaged accounts, and growth stocks in taxable ones, but you can’t manage and separate the two in a balanced fund.
If you were investing through Direct Plan across equity and debt market, you would have been able to relocate the assets according to your tax saving as well as wealth creation. Whereas the fund manager would allocate the resources, keeping in view the objective of the fund and majority. The stipulated allocation, 50%-70% in equity may not always suit your investment goals, needs, or preferences.
Besides, the fund manager may try to play it too safe, avoiding some higher risk/return investment opportunities and thus adversely affecting returns.
- The allocation of the assets is pre-fixed, whereas our priorities change from time to time.
- Tax saving is not always assured.
- Returns may be safe but are still uncertain.
For Equity Oriented Balanced Funds: For those balanced funds which invest a minimum 65% of their corpus in equities, they are considered equity-oriented balanced funds for taxation purposes. Therefore, for all short-term capital gains that occurred, if 1-year has not passed since you bought the fund units, it will be taxed at 15%. If, you had earned capital gains for holdings beyond 1-year, and it exceeds Rs. 1 lakh, a 10% Long Term Capital Gain (LTCG) tax will get levied.
For Debt Oriented Balanced Funds:
The tax treatment for such funds is the same as for 100% Debt funds. As a result, LTCG would get applied if the fund has been held for 3-years or more. For capital gains occurring during the short term (less than 3-years) would be taxed are 20% with indexation benefits.
So we can safely conclude that the equity-oriented balanced funds get you far more tax benefits than investing in debt funds.
The Balanced Mutual Funds may provide you with a better risk-adjusted return, in the long run as compared to returns from purely equity mutual funds. A comparison, considering the standard deviation ratio (very helpful indicator for evaluating best equity mutual funds) is given below. Also, the Rolling Returns method has been used, taking the average returns noted at different points of time, to remove the bias associated with observation only at a particular time.
|S. No.||Fund Category||5-year Rolling Return||Standard Deviation Ratio|
|2.||Large & Mid-Cap Funds||13.96%||3.82|
Best Balanced Mutual Funds of 2019
Presenting to you the top-rated Balanced Mutual Funds in India. We have based this selection on the Returns from them over 3 & 5-years. You would, of course, have different and various other parameters to select the best mutual fund to invest.
|S. No.||Fund Name||3-year Return||5-year Return|
|1.||ICICI Prudential Equity & Debt Fund – Regular (G)||12.68%||13.26%|
|2.||SBI Equity Hybrid Fund – Regular (G)||11.01%||13.64%|
|3.||HDFC Balanced Advantage Fund (G)||12.74%||11.84%|
“This is a representative list, not a recommendation of funds.”
**The data provided in both the above tables is as on December 31st, 2018. Please visit the website for latest information.**
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