Understanding Balanced Mutual Funds: Benefits and Risks

March 29, 2023

496

Table of Contents

Balanced Mutual Funds: A Comprehensive Guide

If you are looking for an investment option that combines the benefits of both equity and debt, balanced mutual funds could be a viable option. Balanced funds, also known as hybrid funds, are mutual funds that invest in both stocks and bonds to provide investors with a diversified portfolio.

In this blog, we will explore the basics of balanced mutual funds, their benefits, risks, and some key considerations to keep in mind before investing.

What are Balanced Mutual Funds?

Balanced mutual funds are funds that invest in a mix of equity and debt instruments. The objective of these funds is to generate income and capital appreciation while balancing the risk associated with equity and debt investments. The proportion of equity and debt investments in these funds varies depending on the fund’s investment objective and the market conditions.

Benefits of Balanced Mutual Funds

Diversification: Balanced mutual funds offer a diversified portfolio of equity and debt investments, which helps investors spread their risk across different asset classes.
Lower Risk: The debt component in balanced funds helps reduce the overall risk of the portfolio, making it a suitable investment option for conservative investors.
Stable Returns: The debt component of balanced funds provides stable returns, which helps to offset the volatility of equity investments.
Professional Management: Balanced funds are managed by professional fund managers who have expertise in selecting the right mix of equity and debt investments, providing investors with an advantage over individual investors.

Risks of Balanced Mutual Funds

Market Risk: Balanced funds are subject to market risk, which means that the value of the investments can go up or down based on the performance of the equity and debt markets.
Interest Rate Risk: The value of the debt investments in balanced funds is sensitive to changes in interest rates, which can affect the fund’s performance.
Inflation Risk: Inflation can erode the value of the returns generated by balanced funds, which can affect the purchasing power of the investors.

Key Considerations for Investing in Balanced Mutual Funds

Investment Objective: Investors should select a balanced fund that aligns with their investment objectives and risk tolerance.
Expense Ratio: Investors should pay attention to the expense ratio of the fund, which can impact the overall returns generated by the fund.
Fund Manager: Investors should assess the fund manager’s track record, experience, and investment style before investing.
Fund Performance: Investors should review the fund’s historical performance to determine if it has generated consistent returns over a long period.

Types of Balanced Mutual Funds

There are primarily two types of balanced mutual funds – equity-oriented and debt-oriented. Equity-oriented balanced funds invest more in equity and equity-related instruments, while debt-oriented balanced funds invest more in debt instruments. The allocation between equity and debt instruments in these funds can vary based on market conditions and the fund manager’s investment style.

Equity-oriented balanced funds can provide higher returns than debt-oriented balanced funds in a bullish market. However, they can be riskier than debt-oriented balanced funds due to their higher allocation to equities. Debt-oriented balanced funds, on the other hand, can provide a stable income stream and are less volatile than equity-oriented balanced funds.

Taxation of Balanced Mutual Funds

Balanced mutual funds are taxed like any other mutual fund in India. Short-term capital gains (if the fund is held for less than 12 months) are taxed at a rate of 15%, while long-term capital gains (if the fund is held for more than 12 months) are taxed at a rate of 10% on gains exceeding Rs. 1 lakh in a financial year.

Dividends from balanced funds are also taxable in the hands of investors at their applicable income tax rate. However, dividends received from equity-oriented balanced funds are tax-free in the hands of investors up to Rs. 1 lakh in a financial year, while dividends received from debt-oriented balanced funds are taxed as per the investor’s applicable income tax rate.

Final Thoughts

Balanced mutual funds can be a suitable investment option for investors looking for a balanced mix of equity and debt investments. These funds offer the benefits of diversification, stable returns, and professional management. However, investors should carefully consider their investment objectives, risk tolerance, and other key considerations before investing in a balanced fund. It is also essential to review the fund’s historical performance and seek professional advice before making any investment decisions. With proper due diligence, balanced mutual funds can be an effective tool for wealth creation and long-term investment planning.

Read more useful content:

Frequently Asked Questions (FAQs)

What is a balanced mutual fund?
A balanced mutual fund is a type of mutual fund that invests in a mix of equity and debt instruments. The objective of these funds is to provide investors with a diversified portfolio of investments that balances the risk associated with equity and debt investments.

What is the difference between equity-oriented and debt-oriented balanced funds?
Equity-oriented balanced funds invest more in equity and equity-related instruments, while debt-oriented balanced funds invest more in debt instruments. The allocation between equity and debt instruments in these funds can vary based on market conditions and the fund manager’s investment style.

What are the benefits of investing in balanced mutual funds?
The benefits of investing in balanced mutual funds include diversification, lower risk, stable returns, and professional management.

What are the risks associated with investing in balanced mutual funds?
The risks associated with investing in balanced mutual funds include market risk, interest rate risk, and inflation risk.

How do I select a balanced mutual fund?
Investors should select a balanced fund that aligns with their investment objectives and risk tolerance. They should also pay attention to the expense ratio of the fund, assess the fund manager’s track record, and review the fund’s historical performance before investing.

Can I invest in balanced mutual funds through a systematic investment plan (SIP)?
Yes, investors can invest in balanced mutual funds through a systematic investment plan (SIP) to invest small amounts of money at regular intervals.

What is the tax implication of investing in balanced mutual funds?
Balanced mutual funds are taxed like any other mutual fund in India. Short-term capital gains are taxed at a rate of 15%, while long-term capital gains are taxed at a rate of 10% on gains exceeding Rs. 1 lakh in a financial year. Dividends received from equity-oriented balanced funds are tax-free up to Rs. 1 lakh in a financial year, while dividends received from debt-oriented balanced funds are taxed as per the investor’s applicable income tax rate.

Can I redeem my investment in a balanced mutual fund anytime?
Yes, investors can redeem their investment in a balanced mutual fund anytime. However, they may be subject to exit loads if they redeem their investment before a certain period.

What is the difference between a balanced mutual fund and a dynamic asset allocation fund?
A dynamic asset allocation fund invests in a mix of equity, debt, and other asset classes, and the allocation between these asset classes is adjusted dynamically based on market conditions. On the other hand, a balanced mutual fund has a fixed allocation between equity and debt instruments, which may vary based on the fund manager’s investment style.

What is the minimum investment amount for a balanced mutual fund?
The minimum investment amount for a balanced mutual fund can vary from fund to fund. Generally, the minimum investment amount can range from Rs. 500 to Rs. 5,000.